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COMMERCIAL CONTRACT DRAFTING AND NEGOTIATION: ADVICE FOR AVOIDING HEADACHES 2011 CCCA ANNUAL CONFERENCE HALIFAX, AUGUST 16, 2011
Transcript
Page 1: commercial contract drafting and negotiation

CommerCial ContraCt Drafting anD negotiation:aDviCe for avoiDing HeaDaCHes 2011 CCCa annual ConferenCe Halifax, august 16, 2011

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Table of ConTenTsTab 1: PResenTaTIonsContext & architecture in Contract Drafting

Dr. stan benda

Contract Drafting: Unenforceability & Uncertaintystuart english & Robert Cohen

Contracting Issues - best Practices and avoiding PitfallsRobert balcom

Tab 2: aDDITIonal MaTeRIalContext & architecture in Contract Drafting Paper by Dr. stan benda

Corporate Counsel bulletin board Press Release

Tab 3: bIoGRaPHIesstuart english

Robert b. Cohen

Robert balcom

Dr. stan benda

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+OVERVIEW

CONTEXT

Non-Legal Considerations

ARCHTECTURE

Devices

Structure

Elements

Style

CONTEXT

Legal Considerations

SPECIFICS

Indemnifications

Reps and Warrants

Put it on the Web

16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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NON- LEGAL CONSIDERATIONS

Personality Issues

Risk Culture Types

Negotiating Facets

Cultural Issues (Government v University v Private)

16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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+LEGAL CONSIDERATIONS

Preservation of promise / Allocation of Risk

Schools of Interpretation

Readership – Five Audiences

Separated in time and context

Different agendas

Speech Communities

Values and Lexicon

Fresh /Organic / Not –From – Concentrate

Opposite of innocent? Opposite of dry?

16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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+ARCHITECTURE

Devices

Term Sheet, MOU, Letter Agreement, Comfort Letter, Formal, Tender & RFP

Formal Contract

Recitals

Elements

Definitions, covenants, statements, reps & warranties, conditions

Style Points

Para headings, footers, sentence structure, fonts, line length & spacing, conspicuous definitions, justification, shall v will v must

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+SPECIFICS

Reps and Warrants

Objective

Definition(s)

Types

Qualifications

Indemnifications

Why – risk, control means

Structure

Scope

Term

Notifications

Exclusions

Subject

Cap

Threshold

Consequence

Web Use

Paper

Scope of work

Execution

Web – boilerplate, ADR

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Purpose of Contracts

To create enforceable obligations that reflect what you intended

slide | 2

2 Key Requirements

● Enforceabilityy

● Certainty

slide | 3

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Six Sources of Uncertainty

● Ambiguityg y

● Undue Generality

● Inconsistency

● Redundancy

● Conflicts

● Vagueness

slide | 4

Interpretation Principles

● Goal of promoting parties’ reasonable expectations p g p p

● Intention of parties determined objectively (not subjectively; not determining actual intention; parole evidence rule)

● Plain meaning assumed to represent parties’ intentions (presumed to have intended what they said)

slide | 5

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Interpretation Principles

● Where words bear 2 interpretations, the more reasonable p ,one, that which produces a fair result, is preferred

● Interpretation that promotes, rather than defeats, purpose and objective should be chosen (context and purpose relevant)

● Literal meaning not applied if it produces absurd or unrealistic result

slide | 6

unrealistic result

Potential Causes of Ambiguity

● Modifiers

● Commas

● And/Or

● May Only

slide | 7

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Modifiers

Syntactic Ambiguityy g y● Adjectives Before Noun Strings

● Exclusions In-Between

● Opening/Closing Modifiers

● Time for Performance

slide | 8

Modifiers

Adjectives Before Noun Stringsj g

The Software shall be fully compatible with all Applesmartphones, tablets and laptops.

The Software shall be fully compatible with all smartphones, tablets and laptops that are Apple products.

The Software shall be fully compatible with all Apple products, i l di t h t bl t d l t

slide | 9

including smartphones, tablets and laptops.

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Modifiers

Exclusions In-Between

Developer licenses the Software for use on all WiFi-enabled computers, excluding tablets, netbooks and laptops.

Developer licenses the Software for use on all WiFi-enabled computers, netbooks and laptops, excluding tablets.

slide | 10

Modifiers

Exclusions In-Between

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services and payments to third parties.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding depreciation, overhead charges and other indirect costs, and payments to third parties.

Insuranceco shall reimburse Service Provider for all payments to third

slide | 11

p yparties and other costs incurred in providing the Services excluding depreciation, overhead charges and other indirect costs.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding: (a) depreciation, overhead charges, and other indirect costs, and (b) payments to third parties.

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Modifiers

Opening/Closing Modifiersp g g

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to third parties not set out in the Cost Schedule and in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges, and

t t thi d ti t t t i th C t S h d l d i

slide | 12

payments to third parties, not set out in the Cost Schedule and in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding: (a) overhead charges, and (b) payments to third parties not set out in the Cost Schedule and in excess of $50,000.

Modifiers

Opening/Closing Modifiersp g g

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding:

a) overhead charges, and

b) payments to third parties

not set out in the Cost Schedule and in excess of $50,000.

I h ll i b S i P id f ll t

slide | 13

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding any costs not set out in the Cost Schedule and in excess of $50,000 that are: (a) overhead charges, or (b) payments to third parties.

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Modifiers

Time for Performance

If the Company disputes any amount set out in the Cost Reconciliation within 30 days Service Provider shall provide documentation supporting its calculation of the costs or a revised Cost Reconciliation.

If the Company disputes any amount set out in the Cost Reconciliation within 30 days, Service Provider shall provide

f

slide | 14

documentation supporting its calculation of the costs or a revised Cost Reconciliation.

If within 30 days of receipt of the Cost Reconciliation the Company disputes any amount set out therein, Service Provider shall promptly provide documentation supporting its calculation of the costs or a revised Cost Reconciliation.

Modifiers

Time for Performance

Buyer shall pay the purchase price to Seller by wire transfer to an account designated by Seller no later than 5 business days after delivery of the goods.

Buyer shall pay the purchase price to Seller, by wire transfer to an account designated by Seller, no later than 5 business days after delivery of the goods.

slide | 15

days after delivery of the goods.

Buyer shall pay the purchase price to Seller, no later than 5 business days after delivery of the goods, by wire transfer to an account designated by Seller.

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Modifiers

Drafting Tipsg p1. Where a string of nouns or clauses is preceded or followed

by a modifier, consider whether the modifier applies to all or only some of the nouns or clauses.

2. Ask yourself when each obligation must be performed; look out for sentences with multiple verb clauses and a time for performance.

slide | 16

3. Clarify by: (a) reordering sentence or changing punctuation, (b) enumerating, or (c) tabulating.

Punctuation

Dear John:I want a man who knows what love is all about. You are generous, kind, thoughtful. People who are not like you admit to being useless and inferior. You have ruined me for other men. I yearn for you. I have no feelings whatsoever when we're apart. I can be forever happy--will you let me be yours?Jane

Dear John:I want a man who knows what love is All about you are generous kind

slide | 17

I want a man who knows what love is. All about you are generous, kind, thoughtful people, who are not like you. Admit to being useless and inferior. You have ruined me. For other men, I yearn. For you, I have no feelings whatsoever. When we're apart, I can be forever happy. Will you let me be?Yours,Jane

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Commas

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to third parties not set out in the Cost Schedule in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges, and payments to third parties not set out in the Cost Schedule, in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to

slide | 18

providing the Services excluding overhead charges, and payments to third parties, not set out in the Cost Schedule in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding any costs not set out in the Cost Schedule and in excess of $50,000 that are overhead charges or payments to third parties.

Commas

Rogers Comma CasegSubject to the termination provisions of this Agreement, this Agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior to notice in writing by either party.

slide | 19

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Commas

Drafting Tipg p4. Check for unintended clauses caused by commas. When

removed, how is sentence affected?

slide | 20

And/Or

“And” between 2 adjectives modifying 1 nounj y g

Credit card and chequing account holders will be entitled to reduced interest rates.

Reduced interest rates will be available to holders of credit cards and chequing accounts.

Holders of either credit cards or chequing accounts, or both, ill b titl d t d d i t t t

slide | 21

will be entitled to reduced interest rates.

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And/Or

“Or” – conjunctive (inclusive) vs. disjunctive (exclusive)j ( ) j ( )

Distributor shall be entitled to sell RIM or Apple products.

Distributor shall be entitled to sell RIM and Apple products.

Distributor shall be entitled to sell RIM or Apple products, or both.

Distributor shall be entitled to sell either RIM or Apple

slide | 22

ppproducts, but not both.

And/Or

And & Or in a Stringg

To qualify individuals must be over 18 years of age and students or living with their parents.

To qualify individuals must be: (a) over 18 years of age, and (b) students or living with their parents.

To qualify individuals must be: (a) over 18 years of age and t d t (b) li i ith th i t

slide | 23

students, or (b) living with their parents.

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And/Or

Drafting Tipsg p5. If a noun is modified by 2 adjectives, clarify whether 2

separate categories are intended or 1 category with 2 criteria.

6. “Or” can have inclusive or exclusive meaning. Clarify to avoid uncertainty (preferably not by using “and/or”).

7. When “and” and “or” are both used in a string of nouns or

slide | 24

clauses, clarify grouping by enumeration.

May Only

“May” used to grant a right or discretiony g g● Alternative to:

● shall have the right to

● is entitled to

● is authorized to

● Specifying how discretion can be exercised may be interpreted as limiting discretion

slide | 25

interpreted as limiting discretion

Distributor may sell RIM products to Rogers.

Distributor may sell RIM products to any retailer including Rogers.

Distributor may sell RIM products only to Rogers.

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May Only

“May…only” – one restriction or two?y y

Distributor may only sell RIM products in Ontario.

Distributor may sell RIM products only in Ontario.

Distributor shall not sell any products in Ontario other than RIM products.

Distributor shall not sell any products, other than RIM

slide | 26

y p ,products that are sold in Ontario.

Unenforceable Provisions

Uncertaintyy● If intention cannot be determined, provision or entire

contract may be unenforceable.

● Rarely due to ambiguity.

● Applies where certain terms are to be agreed upon by the parties after signing the contract; referred to as “agreements to agree”.

slide | 27

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Unenforceable Provisions

EdperBrascan CasepIn the event that not all of the Investments have been sold by March 31, 1998, Brascan will on March 31, 1998 purchase the remaining Investments at their Book Values: either for cash or, at Brascan’s option, for listed common shares or convertible debentures of equivalent value of Brascan Limited, Great Lakes Power Limited, Noranda Inc., or London Insurance Group To determine equivalent value the shares

slide | 28

Insurance Group. To determine equivalent value, the shares chosen by Brascan shall be valued at (a) 95% of their average trading prices on the Toronto Stock Exchange over the 30 days immediately preceding March 31, 1998, or, (b) should Labatt determine that (a) does not represent equivalent value, at a price mutually agreed.

Unenforceable Provisions

Terms to be Agreedg● Generally unenforceable (absent objective criteria)

● Similar to letters of intent and other “agreements to agree” (except that there is an otherwise binding contract)

slide | 29

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Unenforceable Provisions

Drafting Tipsg p8. If possible, do not leave matters to be mutually agreed

upon.

9. If a term is left to be agreed, consider referring to objective criteria, such as fair market value (and determination bythird party, such as accountant, expert, arbitrator).

10. Consider potential consequences of provision being

slide | 30

unenforceable, either entire provision or only a portion ofthe provision. (Note the consequences in theEdperBrascan case.)

11. Describe consequences if parties cannot agree (“If the parties do not agree, then …”).

Duty of Good Faith

What it is not● No pre-contractual duty; no obligation to negotiate in good

faith

● After contract entered into, generally, no duty to negotiate in good faith any terms left to be agreed

● Exceptions:

● Objective criteria

slide | 31

j

● Special relationship

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Duty of Good Faith

What it is● Standard of conduct; applies to the performance of

contractual obligations

● Categories of cases where it has been applied

● Cannot engage in conduct that has effect of defeating contract rights

● Duty to cooperate to achieve contract objectives

slide | 32

y p j

● Exercise of discretion

● Implied term, interpretive tool or independent free-standing duty?

Duty of Good Faith

Best Efforts● “Best efforts” vs. “reasonable efforts”

● Other alternatives:

● Commercially reasonable efforts

● Commercially reasonable best efforts

● Good faith efforts

slide | 33

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Duty of Good Faith

Exercise of Discretion● Required consent, right to accept/reject terms, goods or

services

● Absence of bad faith vs. reasonable

● Capable of objective measurement

● “Sole”, “absolute” and/or “unfettered” may not be sufficient to act arbitrary (may still need to be reasonable)

slide | 34

y ( y )

Duty of Good Faith

Drafting Tipsg p12. Ideally, specify what must be done (or what need not be

done), and excuses for non-performance (force majeure).

13. For broadest discretion, expressly permit unreasonableness.

slide | 35

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2011 CCCA Annual Conference

Enforcement Issues Arising from

C

Issues Arising from Contract Drafting

Robert B. Cohen

Halifax

August 16, 2011

Enforcement of Contractual Provisions (Arbitration Clauses)

● Overview● Review of Enforcement of Contractual Provisions in the

Context of:

● Letters of Intent

● Offers to Lease

● Restrictive Covenants

● Penalty Clauses

slide | 37

● Penalty Clauses

● Arbitration Clauses

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Letter of Intent #1 – The BackgroundWallace v. Allen 2009 ONCA 36

● The defendant decided to sell his businesses and retire.

● After weeks of negotiation, the parties executed a letter of intent for the share purchase and sale of four companies.

● A draft share purchase agreement was prepared and various issues that were intended to be inserted in the share purchase agreement were resolved verbally in a meeting.

● At the closing, the plaintiff did not attend, and the defendant

slide | 38

g, p ,refused to close at a later date.

● The plaintiff sued for specific performance based on the letter of intent as the share purchase agreement was never signed.

Letter of Intent #1 – The ClausesWallace v. Allen 2009 ONCA 36

● “It is also agreed by the parties that there will be much g y plegal work to be done upon acceptance by both sides and that the wording of this agreement may alter somewhat”; and

● “This letter of intent must be reduced into a binding agreement of purchase and sale by the parties within the next 40 days.”

slide | 39

y

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Letter of Intent #1 – The Court Held Wallace v. Allen 2009 ONCA 36

● The Letter of Intent was binding in that the parties used g p“the language of contract”● “It is agreed”

● “Upon acceptance”

● “This agreement”

● “The language of the document itself speaks to an intention to be bound upon signing ”

slide | 40

intention to be bound upon signing.

● The defendant’s refusal to sign previous drafts of the letter because they “left too much in the air” indicated an intention to be bound by this version.

Letter of Intent #2 – The Background Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● The defendant operated a gas station that depended on a p g p“pump support” rebate paid by the plaintiff.

● The business relationship was set out in various written contracts, which did not mention pump support.

● Years later, the plaintiff made a loan to the defendant to make improvements to the gas station.

● Prior to finalizing the loan contracts the plaintiff sent a

slide | 41

● Prior to finalizing the loan contracts, the plaintiff sent a letter of intent stating that pump support would be provided to the defendant’s gas station.

● The plaintiff sued over the loan, and the defendant counterclaimed for the unpaid pump support.

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Letter of Intent #2 – The Clauses Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● “Although this letter contains points agreed to, this is not g p g ,intended to be a binding agreement.”

● “A binding agreement would be entered into only upon our delivering to you fully signed copies of all the contracts.”

slide | 42

Letter of Intent #2 – The Court Held Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● The Letter of Intent was expressly not binding on the p y gparties.

● The Petroleum Contract (one of the loan documents that followed) governed the arrangements for the supply of gasoline, and contained an “entire agreement” clause to preclude the defendant from arguing a collateral contract for pump support based upon the letter of intent.

slide | 43

p p pp p

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Lessons Learned with Letters of Intent

● If you want the Letter of Intent to be binding, make sure y g,that:a)You have incorporated fundamental terms;

b)You choose language which reflects that the Letter of Intent is “binding”; and

c) You have obtained the signature of the other party to acknowledge that the terms of the Letter of Intent are

slide | 44

binding, even if the parties anticipate executing more definitive agreements at a later stage.

Lessons Learned with Letters of Intent

● If you don’t want the Letter of Intent to be binding, use y g,clear language that the letter of intent is meant to be “non-binding” until and unless more formal agreements have been executed by the parties.

slide | 45

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Offers to Lease – The Test

● The leading test for an enforceable offer to lease was set gout in Canada Square Corp. et al. v. VS Services Ltd. et al. (1982), 34 O.R. (2d) 250 (C.A.): ● To be valid, an agreement for a lease must show:

● The parties,

● A description of the premises to be demised,

● The commencement of the term

slide | 46

● The commencement of the term,

● The duration of the term,

● The rent and, if applicable, all the material terms of the contract not being matters incidental to the relationship of landlord and tenant.

Offer to Lease #1 – The Background Upper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● Various drafts of an Offer to Lease were exchanged concerning a furniture store.

● After weeks of discussions and negotiations, the parties signed the Offer to Lease which contained: ● A description of the parties;

● The commencement date of the lease term;

● The duration of the lease term; and

Th t

slide | 47

● The rent.

● Clause 14 of the executed Offer to Lease provided that the Landlord was obligated to provide the Landlord’s standard form of lease to the Tenant.

● The Tenant refused to execute a standard form lease, and the Landlord sued on the Offer to Lease.

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Offer to Lease #1 – The ClausesUpper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● There was a reference to the minimum size of floor space to be leased as “not less than approximately 25,000 square feet, in the approximate location” as would be shown on a floor plan attached as a Schedule “A” to be provided by the landlord. The exact measurements were to be determined in the landlord’s standard form of lease. Schedule “A” was attached to the lease but it was blank.

● “This Offer to Lease shall act as a binding contract until such

slide | 48

This Offer to Lease shall act as a binding contract until such time as the Lease is fully executed by both Landlord and Tenant.”

● “In the event the Landlord and Tenant, acting reasonably and in good faith, cannot agree to the Lease, then this Offer to Lease shall remain in full force and effect and become the Lease.”

Offer to Lease #1 – The Court HeldUpper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● Taken in isolation, the Offer to Lease does show a certain amount of uncertainty regarding the exact parameters and lay-out of the premises to be leased. However, as indicated in the jurisprudence, these portions of the Offer to Lease cannot be considered in strict isolation.

● The description of the premises to be rented as well as the work and estimated cost of that work, on the part of both parties, was sufficiently certain. That essential element was also met in this

slide | 49

Offer to Lease.

● It is significant that the Offer to Lease itself provided a contingency, in the event that the parties could not agree on the standard form of lease. This clause reflects the parties’ mutual intention to enter into a binding lease agreement by way of the Offer to Lease.

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Offer to Lease #2 – The BackgroundHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● The plaintiff sought a declaration that a written offer to lease p gmade with The Regional Municipality of Peel was a valid and binding agreement.

● The offer to lease related to a 15,000 square foot second floor extension to premises the plaintiff owned in a shopping mall.

● The plaintiff had unexpected difficulty in obtaining

slide | 50

permission from the Municipality to build the extension.

● Aware that it could be years before the plaintiff knew whether he could build the extension, the Municipality of Peel told the plaintiff that it was withdrawing from the agreement.

Offer to Lease #2 – The ClausesHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● “The lease shall be drawn for a term of five years, y ,renewable for a further term of five years, subject to the terms and conditions in paragraph 9.”

● “The lease term shall commence on the latter of the following: 1. March 1, 1985; or

2 The date on which the Lessee is in occupancy of the

slide | 51

2. The date on which the Lessee is in occupancy of the leased premises.

Provided however, that the expiry date of the lease shall be adjusted so that it shall expire five years after the commencement date.”

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Offer to Lease #2 – The Court HeldHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● The clause describing the commencement of the term of the glease is tantamount to saying the term will commence when it commences.

● The Court is not entitled to read into the agreement words that would make certain the date for commencement of the term of the lease, words that would make the term begin within a reasonable period after March 1, 1985, or when the premises are ready for occupation To add such words would be to write

slide | 52

are ready for occupation. To add such words would be to write a new contract for the parties, one they could easily have written themselves had that been their intention. But without the addition of such words, the date for commencement of the lease is so uncertain as to make the agreement unenforceable.

Lessons Learned with Offers to Lease

● If you want the Offer to Lease to be binding, you must y g, yincorporate the fundamental terms that are not incidental to all landlord and tenant relationships, including:a)The parties;

b)The commencement and duration of the term;

c) The rent obligations; and

slide | 53

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Lessons Learned with Offers to Lease

d)Any other covenants, conditions and restrictions that are ) yparticular to the relationship (such as leasehold improvements, options to renew etc.).

● “Binding” language should also be referenced in the Offer to Lease, with the signature of all parties, including any guarantors.

slide | 54

g

Restrictive Covenant #1 – The Background H.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● The defendants were employed by the plaintiff selling p y y p ginsurance (property, casualty and automobile) to businesses.

● Both of the defendants had written employment contracts with the plaintiff which contained non-competition/non-solicitation covenants and a liquidated damages clause.

● When the defendants started their own competing

slide | 55

● When the defendants started their own competing business, the plaintiff sued for damages and obtained an interlocutory injunction preventing the defendants from soliciting or accepting business from any of the plaintiff’s clients.

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Restrictive Covenant #1 – The ClausesH.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● “In the event of termination of your employment with the y p yCompany, you undertake that you will not, for a period of 2 consecutive years following said termination, conduct business with any clients or customers of H.L. StaeblerCompany Limited that were handled or serviced by you at the date of your termination.”

● “The damages for any breach of this undertaking shall be a l t 1½ ti th i i i i d b

slide | 56

sum equal to 1½ times the commission income received by you or your subsequent employer on account of business conducted on behalf of persons or businesses that were clients/customers of H.L. Staebler Company Limited as at the time of your termination of employment.”

Restrictive Covenant #1 – The Background H.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● At trial, the judge held that the Restrictive Covenants , j gwere enforceable and awarded $2 million in damages.

● The defendants appealed…

slide | 57

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Restrictive Covenant #1 – The Appellate Court HeldH.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● “This is a non-competition clause. It does not purport to merely restrain the employees from soliciting the clients and customers but it prohibits the employees from “conducting business” with any such clients or customers.”

● “While the Restrictive Covenant has a two-year time limit, it has no geographical limit.”

● “Furthermore, there is no limit in the Restrictive Covenant on the type of work which the Employees are prohibited from

slide | 58

type of work which the Employees are prohibited from conducting: the prohibition is against doing “business” with their clients and customers.”

● “It unreasonably restricts the Employees’ economic interests and goes beyond that which is reasonably necessary to protect Staebler’s proprietary interest.”

Restrictive Covenant #2 – The BackgroundShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● The defendant sold his shares in an insurance agency g ybut continued to work for the agency, entering into a series of employment contracts.

● The employment contracts contained restrictive covenants employed in the business of insurance brokerage within the “Metropolitan City of Vancouver” for a period of 3 years after leaving his employment for any

slide | 59

p y g p y yreason other than termination without cause.

● The plaintiff brought an action against the defendant when he resigned and worked as an agent for a competing business in Richmond, B.C.

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Restrictive Covenant #2 – The ClauseShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● “Shafron agrees that, upon his leaving the employment of g , p g p yMSA or KRG Insurance for any reason save and except for termination by KRG Insurance without cause, he shall not for a period of three (3) years thereafter, directly or indirectly, carry on, be employed in, or be interested in or permit his name to be used in connection with the business of insurance brokerage which is carried on with

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the metropolitan City of Vancouver.”

Restrictive Covenant #2 – The BackgroundShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● The trial judge dismissed the action, finding the term j g , g“Metropolitan City of Vancouver” was ambiguous and the clause unenforceable.

● The Court of Appeal agreed that the term was ambiguous but applied the doctrine of notional severance and held the term meant “City of Vancouver, the University of British Columbia Endowment Lands, Richmond and

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Burnaby”.

● The defendant appealed to the Supreme Court of Canada…

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Restrictive Covenant #2 – The Supreme Court of Canada HeldShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● For a Restrictive Covenant to be reasonable, the terms must be unambiguous. Th i th t ki t f th t i ti t t h thThe onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms.

● Severance can be divided into two types:

● Blue Pencil Severance – where the judge strikes out a portion of the contract, leaving the portions that are not tainted by illegality. Blue pencil severance should be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant.

● Notional Severance reading down an illegal provision to make it legal and

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● Notional Severance – reading down an illegal provision to make it legal and enforceable. Notional severance has no place in the construction of restrictive covenants in employment contracts.

● There is no legal definition for “Metropolitan City of Vancouver”. The Court of Appeal improperly relied on notional severance to resolve this ambiguity. Severance does not permit a court to re-write the covenant to reflect its own view of the parties’ consensus ad idem.

Restrictive Covenant #3 – The BackgroundBonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● The seller sold his business (an investigation service for insurance companies) and remained employed by the buyer pursuant to an employment contract.

● Both the sale agreement and the employment contract contained non-competition clauses.

● The non-competition clause in the sale agreement had expired; however, the clause in the employment contract was still in force

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force.

● The method of defining the geographical limit of prohibited competition was set out in a “descending scope clause”.

● At arbitration, it was held the clause was valid and enforceable.

● The seller appealed to the court.

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Restrictive Covenant #3 – The ClausesBonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● “The employee shall not act or serve as a director, officer, p yemployee, consultant, independent contractor or work in any other position or capacity whatsoever, or acquire an ownership interest in or otherwise conduct any business in competition with the private investigation business of the Corporation within the territories set out below:● The Province of Ontario

● The regional municipalities of York Durham Halton and Peel and

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● The regional municipalities of York, Durham, Halton and Peel and the City of Toronto

● The city boundaries of Mississauga, in the Province of Ontario

● A five kilometre radius from the office premises in which Ram Private Investigators Inc. carries on their private investigating business in the City of Mississauga, in the province of Ontario.”

Restrictive Covenant #3 – The Court Held Bonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● “The arbitrator’s reasons clearly demonstrate his awareness yof the distinction between employment contracts and purchase and sale agreements when it comes to restrictive non-competition covenants and the enforceability of those covenants.”

● ‘I would not interfere with the arbitrator’s finding in this case that all of Ontario was a reasonable geographic restriction. H id ti f “ bl ” l i

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However, considerations of “reasonableness” only arise after first finding there is no ambiguity. The arbitrator erred in resorting to severance as a means of resolving the ambiguity of the descending scope restrictive covenant. The restrictive covenant was unenforceable.’

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Lessons Learned in Terms of Restrictive Covenants

● If you want a Restrictive Covenant to be enforceable, y ,there should be:a)Fresh consideration for the Restrictive Covenant;

b)Precision in terms of the geographic limit;

c) Precision in terms of the type of “business” that is being restricted;

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Lessons Learned in Terms of Restrictive Covenants

d)A reasonable time for the Restrictive Covenant; and)

e)No reference to a “descending scope” of geographical limits.

● Note that the court is much more likely to enforce a Restrictive Covenant in the context of the sale of a business as opposed to a Restrictive Covenant in an

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business as opposed to a Restrictive Covenant in an employment contract.

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Liquidated Damages #1 – The BackgroundMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The Respondents acquired the Applicant’s shares in a p q ppdiagnostic imaging business pursuant to Section 21 of the Shareholders Agreement, which enabled shareholders holding a majority of the outstanding shares to at any time require a minority shareholder to sell all of his shares.

● Section 21(1)(d) of the Shareholders Agreement further

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( )( ) grequired that, on the closing date, the selling shareholder was required to resign from his position as a radiologist, failing which the price to be paid for his shares would be reduced by 25%.

Liquidated Damages #1 – The BackgroundMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The Applicant, who refused to resign, sought a pp , g , gdeclaration that the price reduction section of the Shareholders Agreement was not enforceable.

● The applications judge held it would be unconscionable or seriously unfair to enforce the price reduction section.

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Liquidated Damages #1 – The ClausesMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● Section 21(1)(d) requires that, on the closing date, the ( )( ) q , g ,selling shareholder, “shall resign as a radiologist and any other administrative position he may hold with the Humber River Regional Hospital, such resignation to take effect immediately”.

● “If the Principal of the Vendor does not so resign, the purchase price for the Vendor’s shares shall be reduced

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p pto equal twenty-five percent (25%) of what it would otherwise have been.”

Liquidated Damages #1 – The Divisional Court HeldMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The onus of proving that a clause is a penalty lies with the p g p yparty alleging the clause is a penalty.

● If the clause is a penalty, the party must prove that the penalty is “extravagant and exorbitant in comparison with the greatest loss which could conceivably have flowed from the breach”.

● The section did not prohibit the radiologist from continuing to work. It simply imposed a reasonable economic consequence for doing so by offsetting a loss of income that the respondent

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for doing so by offsetting a loss of income that the respondent would suffer as a result of the radiologist continuing to practice in direct competition.

● The Divisional Court overturned the applications judge and held that the clause was enforceable.

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Liquidated Damages #2 – The BackgroundLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● The defendant received a $450 loan from the plaintiff, $ p ,Loans Till Payday.

● A promissory note was signed agreeing to pay the plaintiff $562.50 a week later.

● When the defendant defaulted, the plaintiff claimed in Small Claims Court for the amount of the note, prejudgment interest at 59%, and liquidated damages of

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prejudgment interest at 59%, and liquidated damages of $500, for a total of $1,114.32.

● The judge did not allow the claim for $500 because he was not satisfied that it was a genuine pre-estimate of loss or reasonable under the circumstances.

Liquidated Damages #2 – The ClauseLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● “Upon failure to make full payment by the specified date, p p y y p ,and should this note be turned over for collection or legal action, I understand and hereby agree to pay an additional $500.00 in costs as liquidated damages and not as penalty.”

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Liquidated Damages #2 – The Court HeldLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● “The fact that the promissory note indicates that the amount p yis liquidated damages and not a penalty is not conclusive.”

● “The essence of liquidated damages is that it is, indeed, a genuine pre-estimate of damages... …Where, however, the agreement is not an agreement to estimate loss in advance but rather a penalty intended to secure performance of the contract, then it is not liquidated damages but rather a

lt d h i t bl ”

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penalty and as such is not recoverable.”

● “Given the lack of evidence in support of the claim, the judge did not err when he concluded that Loans Till Payday did not establish that the amount claimed was, indeed, a genuine pre-estimate or was reasonable.”

Liquidated Damages #3 – The BackgroundPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● Parties entered into agreements to purchase and operate g p ptwo rental properties.

● Passive investors provided a service company with promissory notes (“C-Notes”) to secure their obligation to reimburse the service company for certain “soft costs” to be paid by the service company to set up the investment and for advances ultimately payable to the service

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y p ycompany.

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Liquidated Damages #3 – The BackgroundPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● The agreements provided that, upon the service g p , pcompany failing to cure defaults within a reasonable time after being given notice on two separate occasions, the promissory notes (the amount of which could vary but could be several millions of dollars) were deemed to be paid.

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Liquidated Damages #3 – The BackgroundPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● The service company failed to provide a promised line of p y p pcredit and failed to refund $432,000 in tax overpayments to the passive investors.

● The passive investors commenced arbitration to seek a declaration that the promissory notes were deemed to be paid in full in accordance with the stipulated term of the contract.

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Liquidated Damages #3 – The Arbitrator’s RulingPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● An arbitrator found that there was no attempt to relate the pamount outstanding under the promissory notes to an estimate of the amount of damages and the deemed payment of the promissory notes could therefore be regarded as a “penalty”.

● However, the arbitrator proceeded to apply “equitable principles” to determine whether or not the “stipulated

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p p premedy clause” should be enforced.

Liquidated Damages #3 – The Arbitrator’s RulingPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● The arbitrator then found that because the service company had not established a disparity between the value of the promissory notes and the damage caused by the serious breach by the service company, the “stipulated remedy clause” was enforceable, and it was inappropriate to grant relief from forfeiture in favour of the service company.

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● The service company appealed….

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Liquidated Damages #3 – The AppealsPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● A single judge of the Ontario Superior Court upheld the g j g p parbitrator’s ruling and found that the stipulated remedy clause was not a penalty, as follows:

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Liquidated Damages #3 – The AppealsPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● “Given the nature of the transactions, the roles of the ,parties, the “double notice” provision with its attendant opportunity for remedying the breaches, the large potential for serious damage to the interests and property of the investors, the sophistication of the parties or their representatives and the Arbitrator’s finding (that) it was uncertain that there was a disparity between the value of

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the C-Notes and the damage caused by the breaches, it had not been established that the clause in question was extravagant, extortionate, unconscionable or unreasonable….”

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Liquidated Damages #3 – The AppealsPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● On further appeal to the Ontario Court of Appeal, the pp pp ,decision of the arbitrator and the single judge of the Ontario Superior Court was upheld. In so finding, the Ontario Court of Appeal noted:

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Liquidated Damages #3 – The AppealsPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● “First, it seems more apt to describe deeming the notes paid , p g pas being a forfeiture rather than the payment of a penalty. A penalty is the payment of a sum as a consequence of a breach. By the terms of the clause at issue here, the appellant (the service company) pays nothing on account of its breach. Rather, the appellant forfeits the right to enforce the notes. Admittedly, in the case at bar, we are to some extent looking at two sides of the same coin but as I shall

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extent looking at two sides of the same coin, but as I shall explain, there is good authority to the effect that courts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.”

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Liquidated Damages #4 – “Exit Fees”?

● Contractual provisions that provide for a lump sum p p ppayment to terminate a contractual relationship prematurely without there being a breach by the other party are not considered “penalties” and are therefore not subject to attack on a “genuine pre-estimate of damages” approach as they are considered to be negotiated “exit fees” (see Pike v. Bel-Tronics Co., 2000 Can LII 22489

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ON SC).

Liquidated Damages #4 – “Exit Fees”?

● Commonly found in pre-payment of mortgages or break y p p y g gfees in corporate merger and acquisition transactions.

● If early termination remedy and lump sum payment is based upon non-performance, however, the court may still consider whether the clause is substantively a “penalty clause” (see Hurley Corporation v. Canadian IPG Corporation, 2010 ON SC 681).

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p )

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Lessons Learned in Terms of Penalty Clauses

● If you want a liquidated damages clause to be y q genforceable:a)Expressly indicate that the clause is indeed a “pre-estimate

of damages”;

b)Prepare calculations to reflect how the amount was selected (for evidentiary purposes);

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Lessons Learned in Terms of Penalty Clauses

c) Select an amount that reflects the damages that could ) greasonably occasioned by the breach in question;

d)Provide opportunities to cure the default upon reasonable notice;

e)Consider whether the “stipulated remedy clause” can be drafted as a forfeiture of rights (which may then trigger “relief from forfeiture” principles); and

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f) Consider whether the “stipulated remedy clause” can be structured as an “exit fee”.

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Enforcement of arbitration clauses ● Consideration of Triggering Language

● Remedy is to Stay Court Proceedings

● Example 1 – Narrow Scope and Permissive ● “Any question with respect to the interpretation of this

Agreement may be submitted to arbitration.”

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Example 2 – Broad Scope and Mandatory p p y● “Any controversy, question, claim or other dispute arising

out of or relating to this Agreement or the rights and obligations of the parties in connection therewith shall be referred to a single arbitrator. The award of the arbitrator shall be final and binding and not subject to appeal.”

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Case Scenario 1:● A and B enter into a basic unanimous shareholders

agreement which contains the following arbitration clause:

● “Any question with respect to the interpretation of this Agreement may be submitted to arbitration.”

● A is believed to be misappropriating corporate funds or has diverted corporate opportunities to a separate business

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owned by a spouse.

Enforcement of Contractual Provisions (Arbitration Clauses)

● B brings an action to the Ontario Superior Court to seek g pinjunctive and monetary relief.

● A will be unsuccessful in his attempt to stay (freeze) the Ontario Superior Court action in trying to enforce the arbitration clause as the arbitration clause is not mandatory and has a narrow scope; it therefore does not preclude court process.

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Case Scenario 2:● A and B enter into a basic unanimous shareholders

agreement which contains the following arbitration clause:

● “Any controversy, question, claim or other dispute arising out of or relating to this Agreement or the rights and obligations of the parties in connection therewith shall be referred to a single arbitrator.”

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Enforcement of Contractual Provisions (Arbitration Clauses)

● A is believed to be misappropriating corporate funds or has pp p g pdiverted corporate opportunities to a separate business owned by a spouse.

● B brings an action to the Ontario Superior Court to seek injunctive and monetary relief.

● A will be successful in obtaining a court order to stay (freeze) the Ontario Superior Court action as the arbitration clause by its terms is broad and enforceable to preclude

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clause, by its terms, is broad and enforceable to preclude court process.

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Consequences associated with enforcement of arbitration qclauses ● Significant distinctions between arbitration process and

typical court process.

● Enforcement of arbitration clause may have significant impact on:

● Qualifications or expertise of adjudicator

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● Speed to engage the process and to access an adjudicator

Enforcement of Contractual Provisions (Arbitration Clauses)

● Costs of retaining adjudicator g j

● Confidentiality of process

● Rights of appeal / delay in enforcing award

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Enforcement of Contractual Provisions (Arbitration Clauses)

● Court’s powers to refuse to enforce arbitration clause p● Subsequent 7(2) of Arbitration Act, 1991.

● The court may refuse to stay a proceeding commenced in the Ontario Superior Court of Justice in respect of an issue that is otherwise required to be submitted to arbitration in any of the following cases:

● A party entered into the arbitration agreement while

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under a legal incapacity.

Enforcement of Contractual Provisions (Arbitration Clauses)

● The arbitration agreement is invalid. g

● The subject matter of the dispute is not capable of being the subject of arbitration under Ontario law.

● The motion to stay is brought with undue delay.

● The matter is a proper one for default or summary judgment.

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Lessons Learned in Terms of Enforcement of Arbitration Clauses

● If you want the parties to be subject to mandatory y p j yarbitration, you should:● Indicate that the parties “shall” arbitrate;

● Consider the scope of the disputes that will trigger the arbitration;

● Consider whether to take away rights of appeal; and

● Consider whether to include a basic process, or reference

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Consider whether to include a basic process, or reference appropriate legislation for process, such as the Arbitrations Act, 1991 (Ontario), or the International Commercial Arbitration Act (Ontario), which incorporates the United Nations Commission on International Trade (UNCITRAL).

Panda Bear and Contract Drafting

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Panda Bear and Contract Drafting

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Panda Bear and Contract Drafting

● “Panda Bear”: A tree-dwelling marsupial of Asian origin, g p g ,characterized by distinct black and white colouring. It also …● “Eats shoots and leaves”

● “Eats, shoots and leaves”

● What a difference a comma can make!

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● What a difference a comma can make!

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1. Build Your Team

• The Team:  Depending on the size and complexity of the transaction or arrangement, it could be you and one business person or a multi‐functional team with both internal andperson or a multi‐functional team with both internal and external resources

• Internal Specialists:  Engage the right specialists inside your organization:  tax, IP, HR/Pension, environmental affairs, finance

• External Professionals: Determine the best time to engage outside counsel accountants or other professionals if neededoutside counsel, accountants or other professionals, if needed

• Ownership:  Make sure business team owns and understands the business deal – too often they will not read the document carefully

Identify owners and specialists

2. Darwin’s Theory on the Evolution of a Contract• Term Sheet

– Overview of the deal from an internal business point of view– Before drafting the LOI, start with a term sheet– Make sure you and business people understand the big picture

• Letter of Intent/Memorandum of Understanding

– Framework of the transaction – sets out the parties’ intentions

– It is not intended to be a legally binding obligation unless you specifically make (all or part of) it so

• Definitive Agreement

P i l l l h h l i hi– Particularly relevant when the relationship goes “sour” or some bad event occurs

– This is when good drafting really counts!

• Deal Summary– Useful tool for everyone to have a business‐friendly summary of the signed deal

Term SheetLOI / MOUAgreementSummary

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3. Contracting with or by a Corporate Group

• Corporate Structure:  Today’s reality is that many companies have complicated corporate structures involving many different legal entities.  Correct entity to contract with will depend on many factors:  

– Types of Clauses:  Exclusivity – Non‐competition – Non‐solicitation

– Privity:  Consider which entities should have legal rights and entitlement

– Confidentiality:  Ability to share with corporate group

– Leverage:  May gain leverage by combining related corporate entities.  Do other entities in the group benefit from the contract?Do other entities in the group benefit from the contract?

• “Affiliates”:  Consider importance of this definition

“Affiliates”:  Could want 

definition to be very broad or very narrow

4. Know your Counterparty

• Risk of Default:  Consider default risk and how you would realize your remedy (i.e. indemnity claim/breach of contract claim))

• Financial Condition: How does the counterparty measure up?

– Public Company:  If public, you will have its financials and credit rating.  If a subsidiary, do you need the public company's guarantee or credit support?

– Private Company:  If private, ask to see their financials (are they internally prepared and are they audited or reviewed by an y p p y yindependent accounting firm?)

• Consider guarantee of principal/parent company

• Dunn and Bradstreet credit check references

• Should there be insurance coverage?

• Include other provisions to deal with creditworthiness (reporting, covenants)

“Show me the money!”

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5. Contract Architecture – Ordering /Presentation

• Think carefully about the ordering / presentation of the document – it should tell a story (not a New York Times bestseller b t a stor nonetheless)bestseller, but a story, nonetheless)

• A few principles:– Stick to standard contract architectures and language to speed up the 

other side’s review and thus the negotiations

– Use a Table of Contents

– Present the big picture before the details – recitals serve this purpose

Use descriptive headings leads and sub leads– Use descriptive headings, leads and sub‐leads

– Break it down into manageable sections and group related information together

– Make sure to pay adequate attention to boilerplate –don’t let your “eyes glaze over” Break it down

6. Risk Management• Key consideration in drafting of all contracts

• Need to understand the business and legal risks associated with the agreement

• Ensure proper allocation of risk between the contracting parties

• In an M & A Context

– Limitations of liability:  caps, baskets (tipping basket vs. true deductible), and de minimis claims

– Qualifications:  materiality and knowledge

• Ensure there are not too many carve‐outs

• Ensure the right people are giving the reps

– Length of escrow fund: relationship to survival periods

– Right level of reps and warranties will depend on the size, complexity and degree of due diligence obtained

Ensure proper allocation of risk

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7. Insurance

• Ask yourself: should the counterparty have insurance to back up their performance or commitment?up their performance or commitment?

• If yes, then:

– How much insurance is required?

– Be a named insured

– Ask for a certificate of insurance

– No change in insurer or coverage unless you consent

l f l b l ff– No limit of liability to affect insurance

To insure or not to insure?

8. Service Standards

• What is the service provider required to do?:  When and how often? How is their performance measured? What are the consequences of failing to meet the standards?consequences of failing to meet the standards?

• KPIs: Services Agreements need clearly defined Key Performance Indicators or service standards that they deliver against

• Consequences: Termination right or financial penalties for non‐performance

• Reporting:  Tell you what they have done

• Right to Audit: Access to records and monitoring

• Dispute Settlement: Consider appropriate forumfor arbitrating/settling disputes

Clearly define the KPIs

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9. Implement/Adhere to Contract Authority Protocol

• Important internal governance issues to be established –consider implementing a Corporate Authority Policy

A thorit C id h h th th it t i• Authority:  Consider who has the authority to sign

• Ownership:  We typically have the business team leader (“owner”) and a senior lawyer sign all contracts

• How Much:  Dollar thresholds for different levels of officers?  

• The Board:  Is Board approval required?

• Conflicts: Code of Conduct – self‐dealing or gproviding benefits to friends and family

Internal Governance

10. Contract Reporting Obligations

• Internal Reporting: Essential for private and public companies

– Contractual obligations

K d t it i– Key dates – monitoring

– Financial commitments

• External Reporting: Critical for public companies. Disclosure obligations relating to:

– Filing of Material Contracts – OSC NI 51‐102

– Derivatives – GAAP 

– Guarantees / indemnification obligations – GAAP

– Onerous contracts – GAAP

– Related party contracts – GAAP

– Contractual obligations – OSC Form 51‐102F1

Will any element of this contract need to be disclosed?

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Recap:  Contract Drafting Considerations

1. Build your Team

2 Darwin’s Theory on the Evolution of a Contract2. Darwin s Theory on the Evolution of a Contract

3. Contracting with or by a Corporate Group 

4. Know your Counterparty

5. Contract Architecture ‐ Ordering/Presentation

6. Risk Management

7. Insurance

8. Service Standards

9. Implement/Adhere to Contract Authority Protocol

10. Contract Reporting Obligations

Ethical Issues when Contracting….

You are negotiating on behalf of your client who is the purchaser in an M&A deal What are your disclosurepurchaser in an M&A deal.  What are your disclosure obligations to the other side’s counsel when you discover the following:

1. The Seller has mistakenly offered a $2.5 million escrow, rather than the previously agreed to amount of $1.5 million?

2. The Seller has indicated in its environmental disclosure schedules that there are no underground storage tanks on the owned property.  The Phase II Environmental Audit (either the Seller’s, in the Data Room, or your own) shows otherwise.

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 CONTEXT  &  ARCHITECTURE  IN  CONTRACT  DRAFTING    

The  Opposite  of  Sweet  is…Spicy  or  Dry  or  Sour?  The  Opposite  of  Innocent  is…Precocious  or  Guilty?  

   

 

   

 INTRODUCTION  .....................................................................................................................................................  1  GUTENBERG  V  E-­‐HARMONY  ............................................................................................................................  2  WHAT  IS  A  CONTRACT?  ......................................................................................................................................  5  WHO  READS  A  CONTRACT?  ..............................................................................................................................  6  CONTRACT  ARCHITECTURE  .............................................................................................................................  9  CONTRACT  STYLE  ELEMENTS  .....................................................................................................................  15  INDEMNIFICATIONS  .........................................................................................................................................  18  THE  CONTRACT  IS  TOO  LONG  ......................................................................................................................  22  ENDNOTES  ............................................................................................................................................................  23  

 

 

INTRODUCTION    

Many  lawyers  prefer  being  engineers  instead  of  architects  regarding  contract  drafting.  As  long  as  the  engineering  is  good,  nothing  else  matters.    But  to  the  architect  what  matters  is  what  matters  to  the  user.    What  will  make  the  building  function  for  people?    How  will  people  use  it  and  will  they  use  it  properly?    Will  the  building  encourage  productivity?  Will  people  be  attracted  to  it?    Will  the  users  readily  navigate  it?    Can  the  building  be  adapted  to  different  needs  over  time?    

 To  understand  architecture  –  or  contract  drafting  −  you  need  more  than  a  

degree  (or  two).    You  firstly  need  to  be  alive  to  some  aspects  of  human  behavior,  and  

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yes  even  the  human  aesthetic.    You  next  need  to  understand  superstructures,  their  components  and  their  interaction.  Finally  you  focus  on  any  particular  problematic  areas.  The  latter  focus  for  this  paper  is  on  representations  and  warranties  and  indemnities.  

GUTENBERG  V  E-­‐HARMONY    

To  state  the  banal,  people  come  with  different  personalities.    To  state  the  subtle,  those  personalities  help  fix  the  superstructure  of  the  contract.  There  are  multiple  personality  types  or  dimensions.1  One  system  colour  codes  and  pigeon-­‐holes  people  into  the  following  types:    

 Catalyst       =     blue  

      Stabilizer       =     yellow  /  gold         Theorist       =     green         Improviser       =     orange    

 Amongst  other  traits  blue  sees  possibilities,  works  well  with  others,  values  

teamwork,  creativity,  and  is  democratic.    Green  works  well  with  ideas,  likes  to  start  

not  finish,  is  insensitive,  focuses  on  the  big  picture,  and  is  rational.    Gold  prizes  

harmony,  is  realistic,  dependable,  takes  charge,  and  is  orderly.  Orange  is  resourceful,  

independent,  seeks  action,  is  practical,  likes  to  play,  and  is  clever.    

In  addition,  blues  tend  to  be  credulous  /  idealistic.    Greens  are  skeptical  /  

theoretical.  Yellows  are  fatalistic  /  economical.    Finally  oranges  are  cynical  /  

epicurean.    To  add  complexity  the  theory  argues  that  we  are  two  colours;    in  the  

dominant  colour  we  are  either  an  extrovert  or  introvert;  in  the  subordinate  colour  

we  are  the  opposite.    Some  internet  dating  systems  use  this  regime  to  match  the  

colour  (dominate/subordinate)  and  type  (extrovert/introvert).  It  seems  at  business  

negotiations  that  the  colours  are  deliberately  mismatched  to  fuel  a  fissiparous  not  

harmonious  process.  

Another  pertinent  psychological  context  is  how  people  approach  risk.    One  school  

calls  this  “risk  cultures”2.  Each  “culture”  is  biased  towards  highlighting  certain  risks  

and  downplaying  others.    Pertinent  to  contracting,  there  are  three  types  of  cultures:    

 

Hierarchal:     seeks  legal  equality  –  fears  social  deviance  

Individual:   seeks  equality  of  results  –  fears  regulation  

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Egalitarian:     equality  of  outcome  –  fears  technology  

   

This  might  seem  arcane  and  densely  academic,  but  pause  for  a  minute  and  place  

yourself  into  contract  negotiations  having  an  environmental  aspect.    The  hierarchist  

will  say  expert  knowledge  is  required  to  prevent  the  system  from  being  destabilized  

by  human  intervention.    Regulation  and  data  are  necessary.  The  individual  will  hold  

that  people  underestimate  the  power  of  human  ingenuity  to  overcome  apparent  

limits.  Resources  can  grow.  Experimentation  is  encouraged.  The  egalitarian  would  

seek  strict  regulation/prohibition  to  stop  harm  to  Mother  Nature.  Individualists  and  

hierarchists  disturb  the  natural  order,  which  is  one  of  equality.  Transmute  the  

theory  into  realty,  albeit  crudely,  as  a  boardroom  negotiation  amongst  a  government  

lawyer,  an  oil  company  lawyer,  and  an  environmental  lawyer.  

The  next  consideration  is  negotiating  types.3  

 

      Extroverts     v   Introverts  

      Intuitor   v   Sensor  

      Feeler     v   Perceiver  

      Judger     v   Thinker  

   

Extraverts  enjoy  verbal  interactions  involved  in  negotiating,  working  with  

teammates;  they  are  comfortable  with  stating  their  case  in  an  adversarial  strategy  

and  stating  clients’  needs  in  a  problem-­‐solving  strategy.  They  do  have  problems  

listening,  think  they  know  what  you  are  saying  before  you  say  it  or  finish  saying  it,  

and  will  interrupt  you  with  detailed  comments.  Introverts  by  contrast  are  non-­‐

talkative  (better  listeners  usually);  selectively  disclose  information;  are  reluctant  to  

express  themselves  and  are  frustrated  by  detailed  conversation.    They  tend  not  to  be  

team  players.  

 Sensors  are  linear,  specific  and  literal.    Sensors  focus  on  facts  to  the  exclusion  of  

the  big  picture;  can’t  see  trends.    They  focus  on  specific  details.  Their  opposite,  the  

Intuit  look  at  the  big  picture,  the  concepts;  are  random,  theoretical.    

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Perceivers  ignore  deadlines,  are  tentative  and  go  with  the  flow.    They  have  a  

problem  with  making  a  decision,  bringing  things  to  closure,  are  forever  seeking  

more  data.  Perceivers  prefer  to  act  spontaneously,  have  greater  difficulty  preparing  

and  planning.  Feelers  emphasize  the  effect  the  decision  will  have  on  people  and  

interpersonal  relationships.  They  attend  more  to  human  than  to  technical  aspects  of  

problems  and  value  these  concerns  more  than  any  other  type  of  evidence.  Feelers  

are  naturally  attracted  to  problem-­‐solving  strategies;  prefer  harmony  and  

agreement.    Hence  they  do  not  favor  a  winner–take-­‐all  strategy  

Judgers  are  structured  in  life,  schedule  to  fixed  deadlines,  and  seek  control.    

They  are  uncomfortable  with  uncertainty,  need  control;  are  impatient  with  

negotiating  -­‐-­‐-­‐  push  to  bring  it  to  a  conclusion,  want  to  make  decisions  –  get  things  

done.  They  favor  an  adversarial  strategy  that  defines  and  orders  issues  and  like  to  

control  the  flow  of  information.  Thinkers  do  not  focus  on  the  needs  of  others.    They  

are  impersonal  decision  making  and  avoid  emotional  issues.    They  respond  to  

attacking  comments  with  strongly  phrased  counter  attacks  -­‐-­‐  which  intensifies  

conflict  and  may  lead  to  impasse.  

To  add  to  this  imbroglio,  toss  in  negotiating  biases.    Optimum  bias  is  the  

exaggerated  view  of  success  of  the  dispute  at  another  forum.    One  is  disinclined  to  

make  concessions  e.g.  requires  production  of  all  the  data  to  disabuse  the  party  

suffering  under  the  illusion.    Then  there  is  Reactive  Devaluation.    Party  devalues  the  

concessions  or  offers  made,  one  becomes  parsimonious  rather  than  fixing  the  

appropriate  concession.  Cognitive  Bias    speaks  to  the  situation  of  wrong  

assumptions  about  why  a  party  is  acting  a  certain  way  thus  misconstruing  motives.    

Those  misconstrued  motives  now  form  the  foundation  for  a  "mood"  or  "tone"  in  the  

negotiations.    

Last  but  not  least  we  have  the  concept  of  the  co-­‐operative  vs.  aggressive  

negotiator.  The  co-­‐operative  can  turn  ineffective  by  becoming  gentle,  obliging,  

patient,  forgiving  -­‐-­‐  in  short,  appeasing.    The  cooperative  continually  gives  

concessions  in  the  hope  of  securing  the  deal,  while  the  aggressive  keeps  taking  

without  giving  any  real  concessions.  In  a  worst  case  scenario  the  cooperative  

appeases  an  aggressive  who  bluffs,  withholds  information,  demands,  quarrels  and  is  

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disinterested  in  the  needs  of  the  other  side.      The  oft  quoted  way  to  deal  with  an  

aggressive  negotiator  is  called  “tit  for  tat”.    No  concession  is  given  without  a  

reciprocating  equal  value  concession.4      

WHAT  IS  A  CONTRACT?    

One  often  leaves  a  boardroom  feeling  physically  exhausted,  emotionally  

drained,  intense,  vaguely  angry,  muttering  it  need  not  have  been  that  difficult.    

When  one  subsequently  reviews  the  minutes  of  that  meeting,  there  are  occasions  

where  one  sputters  a  comment  (inevitability  with  an  expletive)  that  the  other  party  

obviously  was  not  at  the  same  meeting!    How  can  one  proceed  now?  To  draft  ,  you  

must  reframe.      

First  clear  the  angst  by  recognizing  the  human  element  described  above  before  

you  walk  into  the  room.  Next  re-­‐characterize  the  negotiations.    Negotiations  are  not  

a  compulsory  unpleasantry  on  the  way  to  a  contract.    Rather  the  negotiations  are  the  

process  that  provides  a  detailed  list  of  the  guidelines  necessary  to  draft  an  effective  

contract.5    Classically  property  law  preserved  status,  contract  law  preserved  

promise,  and  tort  preserved  moral  equilibrium.  6      The  predominant  purpose  of  law  

now  is  to  allocate  risk.  7    You  cannot  allocate  risk  and  draft  an  effective  contract  

without  these  idiosyncratic  guidelines.  Otherwise  you  have  omissions,  misdirected  

resources,  and  out  of  focus  and  out  of  balance  provisions.    

Risk  allocation  hides  an  uneasy  fact.    One  will  always  have  to  deal  with  at  least  a  

scintilla  of  trust.  Why?  

   

• Contracts  are  designed  to  reinforce  trust  and  reduce  risk,  but  when  they’re  

too  detailed  or  rigid,  or  when  they  send  mixed  signals,  they  can  exacerbate  

the  very  problems  they’re  supposed  to  prevent.    

 

• Contracts  that  are  too  rigid  can  be  problematic  if  they  lock  parties  into  

arrangements  that  seem  like  a  good  idea  at  the  time  but  don’t  allow  for  

important  adjustments  as  circumstances  change.  

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• Many  contracts  include  incentives  such  as  performance  pay,  earn-­‐outs  and  

vesting  schedules.    However,  in  some  contexts,  such  incentives  can  signal  

mistrust.8  

   

   Stephen  Covey  argues  that  when  trust  goes  down,  speed  goes  down  and  cost  

goes  up.    He  argues  it  also  creates  work  for  lawyers  —  in  itself  something  worth  

avoiding  —  promotes  bureaucracy  and  undermines  trust  by  discouraging  

spontaneous  displays  of  goodwill.9  The  Warwick  Business  School  demonstrated  that  

deals  conducted  on  the  basis  of  trust,  instead  of  precisely  worded  agreements,  could  

lead  to  benefits  for  both  parties  to  the  tune  of  as  much  as  an  additional  40%  of  the  

total  value  of  a  contract.10  

These  notions  of  guidelines  and  trust  are  in  harmony  with  the  artisan    /  

architect  side  of  a  transaction  lawyer:  apply  the  law  to  the  deal,  not  the  deal  to  the  

law.    This  is  often  phrased  as  the  lawyer  being  a  facilitator,  not  a  spoiler.    Evidently  

the  premium  is  for  creativity,  insights  and  functionality.  Otherwise  drafting  software  

readily  replaces  the  lawyer.  

WHO  READS  A  CONTRACT?    

 The  counsel  of  perfection  holds  that  everyone  should  read  the  contract  the  

same  way;  everyone  should  interpret  it  the  same  way.    The  effluxion  of  time  

compounds  this  problem  in  part  because  of  the  need  for  the  contract  to  be  both  

pliable  and  yet  rigid,  11  and  in  part  because  legal  and  business  contexts  change.  Still,  

who  is  this  “everyone”?    There  are  two  schools  of  thought:  “speech  communities”  

and  five  member  audiences.  

The  five  audiences  are:  the  immediate  parties  (or  more  accurately  the  

negotiating  team  members  in  the  hotel  room  at  2  am).    Next  come  the  

administrators  /  successors.    Anywhere  along  the  time  line  are  “arbitrators”,  be  they  

judges,  mediators,  or  arbitrators  per  se.    Today  there  are  also  the  regulators:  be  they  

government  empowered  or  internal  /  external  auditors.    Finally  each  of  these  

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parties  have  their  advocates.    And  everyone  is  working  at  a  different  time  and  place  

in  law,  business,  politics,  and  budgets.    There  are  also  different  agendas,  e.g.  the  

administrators  might  be  caught  in  a  budget  crunch  and  will  narrowly  interpret  any  

cost  bearing  obligations.      Still  the  notion  is  that  all  of  these  audiences  will  read  that  

clause,  paragraph  or  article  as  the  negotiating  parties  intended  at  2  am,  whether  or  

not  the  quid  pro  quo  that  begat  that  wording  is  immediately  evident.      

Speech  communities  is  another  concept  that  lawyers  might,  with  a  whiff  of      

insouciance,  harrumph  as  some  obtuse  academic  concept.    However,  examine  the  

definition:  One  of  the  primary  variables  among  readers  is  the  different  speech  communities  to  which   they   belong.     A   speech   community   consists   of   a   group   of   person  who  share  a  lexicon,  a  syntax,  and  a  body  of  knowledge  and  values.    A  lexicon  includes  all  the  information  about  words  that  is  stored  in  human  brains.    It   is  much  more  detailed,   more   complex   and   more   subtle   than   any   dictionary   could   ever   be.    Syntax  refers  to  the  ways  in  which  words  are  arranged  in  conventional  structures  that  are  meaningful  to  participants  in  the  convention.    Like  a  lexicon,  the  syntax  of  a   language   is   complex   and   subtle   and   may   differ   in   small   but   potentially  significant  ways  from  one  speech  community  to  the  next.    The  final  thing  shared  by   a   speech   community   –  and   this   is   crucial   –   is   a   set   of   beliefs,   information,  assumptions,  preferences  and  values,  in  short,  a  body  of  “common”  sense.    This  is  what  readers  rely  on  to  make  judgments  about  what  is  plausible,  probable,  reasonable,   relevant   and   important.   Since   we   do   not   all   belong   to   a   single  speech  community,  but  to  any  such  communities  which  only  partially  overlap,  the  meaning  of  a  text  may  not  be  the  same  for  all  of  us.12  [Emphasis  added]  

   

For  those  involved  in  drafting  contracts  involving  highly  advanced  technologies  

—from  aviation  to  genetics  to  medicine  to  physics  to  zoology—recall  how  you  have  

to  both  learn  the  subject  matter  and  learn  how  to  communicate  with  your  client  and  

appreciate  their  ethos  or  culture.  

The  point  is  that  no  matter  how  seemingly  self-­‐evident  the  text  might  appear  to  

the  lawyers  or  immediate  parties,  there  are  different  audiences,  different  speech  

communities.  Take  a  single  word:  the  adjective  “fresh”.      To  a  food  shopper,  “fresh”  

means  recently  harvested  and  unprocessed.  To  the  food  transporter  it  means  

unprocessed  albeit  preserved  by  gas  or  other  means  during  transport,13  e.g.    South  

African  white  grapefruit.    Indeed  “fresh”  to  the  food  industry  means  less  about  time  

or  distance  than  the  technology  that  protects  freshness.14    To  the  US  and  Canadian  

regulator  “fresh”  includes  produce  that  is  waxed,  acid  or  chlorine  washed,  or  

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subjected  to  ionizing  radiation.15    “Organic”  too  has  multiple  meanings  often  

counter-­‐intuitive  to  our  food  shopper  but  not  to  those  not  in  the  industry  (or  speech  

community)  e.g.  industrial  organic16  or  the  fact  of  additives  and  synthetics,  from  

ascorbic  acid  to  xanthan  gum,  beget  the  organic  twinkle.17    “Orange  juice”  is  yet  

another  entertaining  example.18  The  shopper  infers  “not  from  concentrate”  as  

something  closer  to  freshly  squeezed,  thus  fresher.  The  inference  is  wrong.  Indeed  

this  industry  has  fabricated  fresh.19  The  audiences  outside  of  the  speech  community  

are  not  privy  to  these  sorts  of  lexicons.  The  key  member  of  those  outside  audiences  

is  the  bench.  

Consequently  it  comes  with  little  surprise  that  this  complexity  of  interpreting  a  

contract  has  begat  a  tome  of  legal  doctrines20:    

 

• fundamental  precepts  (e.g.  parol  evidence);    

• elements  (e.g.  custom  and  usage/  dictionaries);    

• implied  terms;    

• outside  doctrines  (e.g.  rectification);    

• contract  types  (e.g.  insurance)    

• clause  types  (e.g.  best  efforts)  etc.      

 

Then  there  are  the  strategic  approaches:  textual  v  intentional  v  normative.  21  

The  Courts  have  voiced  support  for  all  manner  of  interpretation  given  what  was  

before  them.22    The  guise  is  the  oft-­‐quoted  “business  efficacy”  or  “fair  result”.    The  

point  is,  how  can  one  draft  anything  and  expect  a  consistent  interpretation?    The  

drafter  has  to  deal  with  a  brew  made  up  of  personality  /  risk  /negotiating  types,  

speech  communities/audiences,  with  a  dollop  of  legal  interpretation  doctrines  and  

more  than  a  pinch  of  judicial  arbitrariness.    Using  clarity  of  thought  and  

presentation  is  a  trite  but  nevertheless  relevant  response.    There  are  two  other  

strategic  approaches  that  merit  scrutiny:  contract  architecture  and  contract  

elements.    

   

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CONTRACT  ARCHITECTURE    

The  foundation  of  any  agreement  is  choosing  the  right  device.    Classically  these  

structures  were:    

 

• Term  Sheets  /  Minutes  of  Settlement  

• Memorandum  (MOU  /  LOU)  Letter  of  Intent  (LOI)  

• Letter  Agreement    

• Comfort  Letters  

• Formal  Agreement  (as  to  structure  not  as  to  the  use  of  a  seal)    

• Series  of  Agreements  (matrix  or  parallel)  

• Umbrella  /  master  with  subsidiary  contracts  

• RFP,  Tenders,  Expression  of  Interest,  Request  for  Qualifications    

 

Amongst  the  considerations  in  determining  which  device  to  use  are:  client’s  

expectations,  goals  and  needs;  complexity  of  transaction;  stage  of  transaction;  

sophistication  of  the  parties;  and  costs.      Each  device  generally  has  idiosyncratic  

concerns  that  require  idiosyncratic  clauses.    The  comfort  letter  should  not  be  a  de  

facto  undertaking.23    The  MOU  must  explicitly  identify  if  it  is  enforceable,  not  

enforceable  or  a  hybrid  (e.g.  confidentiality  provisions).24    Tendering  has  a  whole  

plethora  of  decisions  that  make  Canada  unique  in  this  field.25    Letter  agreements  

work  best  in  industries  with  a  shared  ethos  or  operating  principles,  eg.  oil  &  gas.  

One  key  point  gets  forgotten  in  the  fury  of  negotiations,  personalities,  industry  

norms.    When  is  the  deal  the  deal?  

 If   the   documents   or   letters   relied   on   as   constituting   a   contract   contemplate   the  execution   of   a   further   contract,   it   is   a   question   of   construction   whether   the  execution  of  the  further  contract  is  a  condition  or  term  of  the  bargain  or  whether  it  is   a   mere   expression   of   desire   of   the   parties   as   to   the   manner   in   which   the  transaction  already  agreed  to  will  in  fact  go  through.    In  the  former  case  there  is  no  enforceable  contract  either  because   the  condition   is  unfulfilled  or  because   the   law  does  not  recognize  a  contract  to  enter  into  a  contract.    In  the  latter  case  there  is  a  binding   contract   and   the   reference   to   the   more   formal   document   may   be  ignored.26  [Emphasis  added]      

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Consequently  a  clause  must  explicitly  state  when  the  deal  crystallizes,  and  

contract  administration  must  be  alive  for  actions  done  on  reliance  of  statements  

made  in  the  negotiations  or  consistent  with  practices  in  that  “speech  community”  

but  outside  of  a  extant  agreement.    

That  brings  us  to  the  formal  contract  and  its  particular  architecture.      

   

• Preamble    o Title  Date  /  Commencement  /  Parties  

•  Recitals  •  Consideration  •  Elements:      

o Definitions  o Obligations  [Covenants]  o Statements,    o Reps  &  Warrants,    o Conditions            

•  Testimonium,  Attestation  and  Seals  •  Schedules  /  Appendices  /  Exhibits  

     

 For  this  drafting  paper  the  emphasis  will  be  on  one  forgotten  device—

recitals—and  the  incorrect  used  of  the  other—elements.  

Recitals  are  often  ignored  by  transaction  lawyers,  and  utilized  by  intellectual  

property  lawyers.    Presumably  this  is  because  the  IP  bar  deals  with  contracts  that  

have  decade  or  decades-­‐long  terms.    Regardless,  recitals  provide  the  global  context  

of  the  contract.    Recitals  articulate  the  lexicon  and  factual  setting  of  the  agreement.  

 

• Explain  the  scientific,  business,  and  legal  backdrop  in  pedestrian  

terms;  

• Highlight  the  history  of  the  parties,  what  they  bring,  what  they  need;  

•  Identify  the  motives,  expectations  and  approach  of  the  parties;  and  

•  Incorporate  the  extrinsic  evidence.    

 

Recitals  are  a  roadmap  and  explanation  left  by  the  negotiators  for  the  other  

audiences.    One  could  argue  recitals  articulate  what  the  “speech  community”  /  

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negotiators  were  thinking,  doing  and  why  they  compromised.      Recitals  are  

scrupulously  factual.    Thus  recitals  are  a  briefing  note  for  the  judge.    Indeed,  the  

litmus  test  of  efficacy  is  whether  the  recitals  give  the  judge  ignorant  of  all  

circumstances  in  the  making,  contents,  subject  matter  and  community  of  practice  of  

the  contract,  a  context  and  compass  bearing  for  the  intended  interpretation  of  that  

contract.  

Recitals  are  often  dismissed  as  meaningless  or  without  legal  import.    

Incorrect.  The  rules  are  as  simple  as  they  are  self-­‐evident:  

 

• If  the  recitals  are  clear  and  the  operative  part  is  ambiguous,  the  recitals  

govern  the  construction.  

 

•  If  the  recitals  are  ambiguous,  and  the  operative  part  is  clear,  the  operative  

part  must  prevail.  

 

•  If  both  the  recitals  and  the  operative  part  are  clear,  but  they  are  inconsistent  

with  each  other,  the  operative  part  is  to  be  preferred.27  

   

The  high  water  mark  for  recitals  was  the  Bitove28  decision  that  held  that  the  courts  

will  use  recitals  to  achieve  “an  intelligent  economic  transaction  and  a  reasonable  

arrangement  between  the  parties”.    

  There  is  one  inescapable  archaic  point.    To  make  well-­‐drafted  recitals  

effective,  you  must  either  reference  the  recitals  in  the  contract  proper—a  statement  

to  the  effect  the  recitals  are  true  and  correct—or  put  the  contract  under  seal.29    The  

seal  or  statement  acts  as  an  estoppel  against  any  party  from  later  denying  those  

facts  in  any  action  based  on  the  contract.30  

  The  contract  proper  can  be  broken  into  such  divisions  as  consideration,  

payment  terms,  obligations,  representations,  conditions,  boilerplate,  definitions,  etc.  

However  the  Alberta  Bar  in  the  early  1990s  and  the  LSUC  commenced  teaching  

contract  drafting  through  elements.    Again  these  are:    

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• Definitions  

• Covenants  (obligations)  

• Representations  &  Warranties  

• Conditions  

• Statements  

The  advantage  of  using  the  element  structure  to  draft  a  contract  is  rooted  in  

the  fact  the  elements  are  mutually  exclusive.    A  contract  sentence  can  only  be  one  of  

the  five.  This  facilitates  cleaner  drafting  and  organization.    An  oft-­‐quoted  example  is  

“Time  shall  be  of  the  essence”.    It  is  written  as  a  covenant  but  there  is  no  action  

vested  in  a  party.    The  example  is  really  a  statement,  and  as  such  should  be  properly  

written  as  “Time  is  of  the  essence”.  

Definitions  come  in  various  versions  and  most  drafting  textbooks  identify  

them  as  follows:  

 

• Restricting  (means)    

•  Enlarging  (includes)    

•  Confining  (does  not  include)    

•  Compound  (two  or  more  defined  terms)  

•  Extending  (additional  meanings)  

•  Clarifying    

•  Delegating  

•  Labelling  (short  name  for  a  group  /  body  /  party)  

 

The  basic  rule  is  to  to  avoid  counter-­‐intuitive  definitions  and  not  overburden  them  

(easier  said  than  done  with  some  IP  licences).  

  Covenants  are  identified  by  the  verbs:  shall,  will,  must,  is  entitled  to.    The  

key  point  to  note  is  W5:  who  does  what  to  whom,  when  and  why.    Furthermore,  the  

covenant  ‘s    structure  is  “X  shall  [verb]  Y,  by  not  later  than…”.    The  subject,  verb,  

object  format  is  highly  recommended  for  clarity.    Beware:  this  is  not  an  excuse  to  

say  “X  agrees  to  assign  to  Y….”  That  is  problematic  for  technical  and  substantive  

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reasons.    The  fact  of  agreement  is  expressed  in  the  ceremonial  consideration  clause  

“NOW  THEREFORE  in  consideration….the  parties  agree  as  follows”  .    To  repeat  

“agree”  is  to  be  redundant.  

  A  recent  USSC  decision  also  holds  that  to  say  “agrees  to  assign”  speaks  to  the  

future  not  the  present.    So  a  subsequent  agreement  with  the  party  that  states  the  

party  “assigns”  prevails  over  the  antecedent  agreement  that  covenants  “agrees  to  

assign”.31  

    A  statement  is  a  bald  fact:  effective  date,  time  of  the  essence,  notice,  etc.  

    A  condition  is  a  requirement  antecedent  or  subsequent  that  then  triggers    or  

enables  action.  The  classic  structure  is:  

 

• Terms  

• Time  to  satisfy  

• Whose  benefit  

• Notice  of  satisfaction  /  outstanding  

• If  not  satisfied,  remedy  

• If  not  satisfied,  waiver  by  beneficiary  

 

What  gets  missed  is  that  if  you  have  a  possible  or  discretionary  condition,  

then  a  further  action  is  possible.    Therefore  the  applicable  verb  is  “will”,  not  “shall”,  

regarding  the  further  action.    If  the  condition  is  mandatory,  the  applicable  auxiliary  

verb  is  “must”.      Law  students  must  article  prior  to  their  call  to  the  bar.    If  the  

purchaser  pays  30  days  in  advance,  then  the  seller  will  deliver  to  the  seller  the  

products…  

    Representations  and  warranties  are  a  fact  and  a  promise  of  veracity  and  

you  need  both  in  order  to  have  a  cause  of  action.32  Then  again  some  say  the  

distinction  lies  with  breach.    A  breach  of  a  representation  is  a  tort,  while  a  breach  of  

a  warrant  is  purely  contractual,  thus  having  different  elements,  remedies  and  

limitations.33  Most  US  lawyers  hold  that  a  representation  states  current  facts  while  a  

warranty  refers  to  the  future.34    

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  Whatever  the  case  might  eventually  be,  reps  and  warrants  come  in  three  

families:  the  contract  itself  (e.g.  the  party  has  capacity  and  authority);  subject  

matter  of  the  contract  (e.g.  patents  and  no  infringement);  and  the  parties  

themselves  (e.g.  financial  or  scientific  capacity).35  

  Representations  and  warranties  are  fixed  in  time,  usually  the  closing  or  

effective  date.    US  commenters  call  this  the    “bring  down”.      Representations  are  not  

made  subsequent  to  the  execution  or  effective  date.    In  that  instance  the  proper  

element  is  a  condition.    Sometimes  a  party  will  say  the  reps  and  warrant  survive  

closing.    This  is  not  to  say  the  reps  and  warrants  are  “evergreened”.    It  merely  is  

collateral  effect  from  land  transfers,  where  the  reps  and  warrant  merge  with  the  

transfer  of  title.      

 One  must  be  intimately  familiar  with  the  applicable  area  of  law  in  order  to  

craft  the  subject  specific  reps  and  warrant.    For  example  one  does  not  rep  that  a  

patent  is  valid;  rather  the  rep  is  that  the  patent  issued  or  is  registered.    (A  patent  can  

be  impeached  unless  there  was  litigation  finding  in  favour  of  the  patent,  and  the  

appeal  periods,  passed.    Only  in  that  instance  can  one  say  “valid”.)  One  multi-­‐

national  corporation  was  notorious  for  demanding  a  rep  and  warrant  that  the  

technology  did  not  infringe  any  patents…or  trade  secrets.      

Reps  and  warrants  may  be  bald,  but  often  come  with  some  qualifications.  

The  generic  list  typically  involves:    

 

• Time  

• Territory  

• Subject  Matter    

• Scope    

• Knowledge  

• Materiality  

• Impact  /  Consequence.  

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The  previous  qualifications  about  materiality  /  impact  ensure  that  neither  a  

cosmetic  breach  of  a  rep  and  warrant  nor  a  major  breach  with  a  trivial  economic  

consequence,  sounds  in  damages.  

As  to  the  future,  the  argument  is  that  modern  drafting  techniques  suggest  all  

that  is  necessary  is  for  a  party  “to  represent”.    The  objective  is  an  assertion  of  fact  to  

induce  the  contract.    Misrepresentations  come  in  three  versions:  innocent,  negligent  

and  fraudulent  and  those  are  a  sufficient  framework  to  deal  with  any  breaches.36  

Warranty  is  a  superfluous  and  confounding  addition.  

CONTRACT  STYLE  ELEMENTS      

    Style  matters,  and  if  you  do  not  believe  that  ask  yourself  how  you  feel  when  

you  pick  up  a  British  Law  Report  that  is  one  solid  page  of  small  font  print  with  nary  

an  indent,  minimal  line  spacing  and  fully  justified.    When  a    page  is  so  densely  

populated  with  text  you  need  to  usea  ruler  so  as  not  to  skip  any  lines.    This  style  

defeats  the  clarity  or  crispness  of  any  drafting  since  readers  eschew  reading.  

  The  first  preliminary  point  is  to  pick  the  typeface,  the  font  family.    Some  

fonts  work  best  in  smaller sizes, others in larger sizes and  still  others  for

conspicousness. This  is  because  of  the  height  and  especially  the  width,  

thickness  and  distance  between  letters.    Times  Roman  is  often  used  because  it  was  

the  original  default  font.    However,  contracts  are  read  on  screens  –  computer,  PDA,  

tablets  –  as  well  as  on  paper.    Tahoma  was  originally  designed  for  computer  screens  

and  paper.      

  The  second  point  is  serif  or  sans-­‐serif.    Sans  serif  letters  do  not  have  the  little  

serifs  –  extensions  –  originally  unavoidable  in  woodcut  presses.    Readers  prefer  serif  

fonts  because  the  eye  follows  along  via  the  serifs.    It  is  easier  to  read  long  documents  

in  serif.    Two  recent  fonts  –  Calibri    (sans-­‐)  and  Cambri    (serif)  were  designed  for  

both  text  and  screen.37  The  narrative  in  this  paper  is  Cambri,  the  headings  in  Calibri.    

Some  lawyers  prefer  Palatino  Linotype  and  Book  Antique  for  contracts  and  

Garamond  for  correspondence.38  

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  The  next  point  is  line  spacing.    Until  Microsoft  2010  line  spacing  had  three  

options—1  /1.5  and  2.    Most  contracts  had  single  (one)  line  spacing.  The  suggestion  

then  was  to  burrow  into  the  software  and  change  a  setting  to  1.1.  Word  software  

now  provides  4  choices  —  1  /  1.15  /  1.5  and  2.      The  new  choice  of  1.15  spacing  is  

the  line  spacing  in  this  paper.    

  Size  matters.  Type  is  measured  in  points,  and  anything  10  points  or  less  is  

too  small.    It  is  too  small  to  read,  too  small  to  effectively  convert  to  pdf,  and  certainly  

too  small  for  faxing.  

  Length  matters.    A  line  that  is  easy  to  read  should  be  a  maximum  of  2  

alphabets  or  52  characters.  After  that  readers  start  to  lose  their  place.    That  is  the  

reason  for  columns  in  newspapers,  and  smaller  (less  than  8.5  X  11)  paper  sizes  in  

most  books.39  How  do  you  avoid  overly  long  lines?  

  Paragraph  sculpturing  is  a  key  style  device  that  enables  any  reader  at  any  

time  to  readily  comprehend  the  objective  of  the  paragraph    Paragraph  sculpturing  

entails  indenting  each  section,  sub-­‐section,  sub-­‐sub-­‐section.  

 

1.0  

  1.1  

    (a)  

    (b)  

      (i).  

   

  Justification  (left,  centre  or  right)  should  be  left,  leaving  the  paragraph  

having  a  ratty  edge.    Left  justification  allows  the  typeface  to  have  the  same  distance  

between  each  letter  and  word.    By  contrast,  full  justification  while  seeming  neater  

with  its  box-­‐like  text  requires  differing  spaces  between  letters  and  words,  causing  

rapid  eye  fatigue.    Newspaper  columns  use  full  justification  and  you  sometimes  see  

words      s    p    r    e    a    d        o  u  t    or  the  final  word  is             far  off.  

  Defined  terms  should  be  conspicuous.  Lawyers  often  just  capitalize  their  

defined  terms.    Most  contracts  have  a  multitude  of  capitalized  terms,  not  all  of  them  

defined.  Hence  the  suggestion  to  used  bold,  italics  or  colour    (not  underlining—too  

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distracting)  to  strike  the  reader  immediately  that  the  word  belongs  to  a  lexicon  /  

speech  community.  

  Title  paragraphs.    Sound  bite  headings  alert  the  reader  as  to  what  to  expect.    

With  Word,  headings  can  be  automatically  generated  into  a  table  of  contents,  

enabling  quick  document  searching  as  opposed  to  “I  read  it  in  there  somewhere”.    

Some  lawyers  add  a  boilerplate  statement  that  the  headings  are  not  part  of  the  

contract.    The  writer  doesn’t.  I  want  the  judge  to  consider  them;  I  want  to  focus  the  

judge  using  the  headings.  

  The  counsel  of  perfection  states–never  have  cross  references.    The  practical  

answer  is  they  are  unavoidable.    But  cross-­‐references  are  deadly.    As  draft  after  

draft  is  prepared,  paragraph  numbers  change.    The  danger  is  not  that  the  cross-­‐  

reference  makes  no  sense  in  the  executed  copy  (that  is  a  dud).    Rather  the  problem  

is  that  it  does  operate  with  unintended  obligations.    The  solution  is  to  use  both  

paragraph  number  and  paragraph  heading  in  every  cross-­‐reference.    The  heading  

clarifies  any  problem  with  the  numbering.  

  Footers  are  wonderful  devices  to  keep  track  of  draft  dates  and  versions.    

They  also  act  as  a  thread  weaving  the  contract  to  the  execution  page  to  the  

schedules.    What  belongs  together  is  vividly  marked.    Thus  you  no  longer  need  to  

have  the  last  portion  of  the  contract  narrative  leak  onto  the  execution  page.  

  Last  but  not  least,  beware  of  what  I  call  the  three  stooges:  shall,  will,  must.    As  

noted  there  are  rules  for  their  use,    

 

• To  create  a  right,  say  “is  entitled  to”  

•  To  create  a  discretionary  authority,  say  “may”  

•  To  create  a  duty,  say  “shall”  

•  To  create  a  mere  condition  precedent,  say  “must”  

•  Post  condition  satisfaction  obligations,  say  “will”  

•  To  negate  a  right,  say  “is  not  entitled  to”  

•  To  negate  a  discretionary  authority,  say  “may  not”  

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•  To  create  a  duty  or  mere  condition  precedent,  say  “is  not  required  

to”    

•  To  create  a  duty  not  to  act  ,say  “shall  not”  

   

  To  summarize  up  to  this  point:    

 

• Be  alive  to  human  personality,  risk  and  negotiating  types.    The  key  

point  is  to  recognize  which  types  conflict  with  your  type  so  the  

friction  can  be  managed  and  the  objective  met.    

• Identify  the  core  values  /  concerns  (guidelines)  of  the  parties  and  

identify  the  degree  of  trust  present.    That  can  then  be  transmuted  into  

a  contract  prose.      

• Chose  the  architectural  device  befitting  the  situation  and  ensure  

structural  and  idiosyncratic  clauses  are  prepared.  

o Ensure  all  the  audiences  understand  the  formal  document  

the  same  way,  irrespective  of  their  knowledge  or  ignorance  

of  the  subject  matter  and  surrounding  circumstances.    This  

entails  fulsome  recitals.  

o Use  of  paragraph  headings  means  a  table  of  contents  

precedes  the  recitals  and  reveals  the  entire  narrative  

superstructure.      

o Employ  style  devices  to  easily  guide  the  reader  through  the  

document  and  facilitate  use  of  the  document  by  anyone  no  

matter  how  unfamiliar  with  the  deal,  subject  or  business  

culture.  

 

INDEMNIFICATIONS      

Indemnifications  are  de  rigeur  in  contracts,  but  so  are  circumscriptions.  The  

classic  definition  of  an  indemnity  means  either  to  prevent  loss,  so  that  it  does  not  

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occur,  or  to  make  reimbursement  or  compensation  after  the  loss.40  From  a  drafting  

perspective  indemnifications  are  like  ADR  provisions  –  if  not  expected,  a  short  pithy  

paragraph  is  inserted.    If  there  is  some  likelihood  of  invocation,  the  paragraph  now  

becomes  an  article  or  schedule  in  the  contract.  

Indemnifications  arise  in  a  number  of  legal  contexts:  statutory,  contractual,  

restitutionary  and  negotiable  instruments.41    In  the  contractual  context  the  

indemnifying  party  either  indemnifies  the  indemnified  party  for  losses  under  the  

contract  (direct)42  or  for  third  party  losses  claimed  against  the  indemnified  party  

(indirect)  or  both.  

Indemnifications  are  distinct  from  damages  in  the  sense  that  damages  are  

subject  to  legal  principles  of  reduction,  remoteness,  mitigation  while  an  indemnity  

should  be  for  “all  losses”.43  

In  intellectual  property  agreements,  particularly  licences,  require  an  

examination  of:  

 

• Risk  -­‐     stage  of  development  of  the  technology;  

• Control  –     risk  factor  controlled  by  each  or  both  of  the  parties  

• Means–   ability  of  each  party  to  accept  and  manage  the  risk.44  

 

For  instance  is  the  level  of  trust  and  experience  such  that  an  indemnity  is  not  

necessary?    A  party  may  be  sufficiently  robust  and  vigorous  to  aggressively  defend  

both  interests.    In  counter-­‐distinction  the  vulnerable  party  seeks  insurance  and  

demands  insurance  coverage  for  the  indemnifying  party.    Thorough  due  diligence  

fixes  risk,  control  and  means.  

The  superstructure  of  an  indemnity  has  two  prongs,  what  is  covered  and  

what  is  not.  What  is  covered  has  the  following  components:  

 

• Indemnity    

• Subject  matter  

• Parties  

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• Scope  of  damages  

• Limitations  /  Exclusions  /  Caps  

• Term  

• Procedures  /  notification  

 

The  indemnity  often  states  “to  indemnify,  defend  and  save  harmless”.  There  

is  some  dispute  as  to  whether  the  three  verbs  are  discrete.    Also  does  the  party  want  

the  other  party  to  hire  and  direct  counsel  or  does  the  indemnified  want  to  hire  his  

own  paid  by  the  indemnifier?  Moreover  the  parties  can  wear  both  hats.    The  licensor  

may  indemnify  the  licensee  for  infringement  actions,  while  the  licensee  indemnifies  

the  licensor  for  product  liability.    Regardless  both  parties  should  assist  in  the  

litigation,  one  may  have  the  documents,  the  other  the  liability.  

When  it  comes  to  settlement  the  parties  are  in  a  conflict  of  interest.    

Resolution  for  one  might  vests  additional  duties  on  the  other  or  shave  away  some  

rights.    The  issue  can  be  ignored.    The  issue  can  also  be  addressed  by  holding  the  

party  that  accepts  a  greater  economic  burden  will  be  indemnified  by  the  party  that  

benefits  from  it.45  A  licensee  whose  scope  of  IP  rights  is  now  reduced  or  otherwise  

disrupted  are  defrayed  by  a  royalty  abatement  or  otherwise  mitigated  by  the  

licensor.  

The  subject  matter  while  trite  can  be  missed.  46  Is  it  obligations  under  the  

contract  only?      Is  it  any  third  party  claims  only?    Is  it  both?    Does  it  encompass  any  

third  party  claims  arising  under  the  project,  not  just  under  that  particular  contract?  

Scope  can  include  whether  the  damages  are  foreseeable  or  not  and  whether  

or  not  the  negligence  of  the  indemnified  party  is  included  or  excluded.      The  

indemnity  can  be  narrow  and  cover  only  patent  infringement  claims  under  the  

licensed  patent.  

Term  can  be  complicated.    Is  it  the  term  of  the  contract,  the  term  of  the  

contract  plus  any  limitation  period  or  for  any  claims  arising  during  the  term  until  

the  litigation  is  completed?  Make  it  recondite  with  a  multi-­‐jurisidiction,  multi-­‐legal  

system  indemnity.      

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Notification  must  be  timely.    In  intellectual  property  cases  the  party  needs  to  

determine  if  it  should  commence  impeachment  proceedings  in  other  jurisdictions.    

Conversely  it  enables  a  negotiated  settlement  before  positions  become  ossified.    

Notification  also  triggers  the  right  of  the  licensee  to  cease  paying  royalties  pending  

resolution  of  the  infringement  action  or  the  payment  of  royalties  into  trust.47  

Exclusions  from  the  indemnity  beyond  the  four  corners  of  the  foregoing  

points  generally  include:  

   

• Categories  of  damages    

• Scope  of  damages    

• Deductibles  /  Thresholds  

• Caps  

• Aggregates  

• Contra  proferentum  et  al  

 

Thresholds  avoid  processing  every  picayune  claim.      

Deductibles  instill  some  further  probity  or  a  disciplined  approach  by  

divvying  some  of  the  risk  and  costs.  

Caps  identify  the  maximum  liability  of  a  party  per  incident.    For  a  licensor  is  

it  is  some  multiplier  (including  1)  of  the  royalties  received.    Otherwise  the  licensor  

could  find  itself  in  the  painfully  ironic  position  of  being  without  an  income  stream  

under  the  contract  yet  paying  to  defend  a  licensee.    

Aggregates  are  simply  the  maximum  amount  payment  on  all  claims.  

Scope  of  damages  typically  excludes  consequential,  incidental,  punitive  

everything  other  than  direct  foreseeable  damages.  

Categories  of  damages  often  means  which  causes  of  action  are  in  or  out  of  

the  indemnity.    A  strictly  written  indemnity  for  patent  infringement  would  

necessarily  exclude  product  liability.    There  are  a  number  of  torts  that  apply  to  IP  /  

business  so  an  exclusion  of  negligence  per  se  might  be  insufficient.    The  exclusions  

would  need  to  identify  the  relevant  torts  as  well  as  negligence—and  whose.  

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There  is  a  plethora  of  decisions  as  to  how  the  courts  take  a  dim  view  of  

exclusion  clauses.48    Hunter  is  the  seminal  decision  under  which  exclusion  clauses  

are  rendered  nugatory  as  unconscionable,  unfair,  unreasonable  or  contrary  to  public  

policy.49  Consequently,  one  does  need  to  remove  some  arrows  from  the  judge’s  

quiver.    The  first  is  the  contra  proferentum  rule.    While  not  possible  with  contracts  

of  adhesion,  once  a  contract  is  a  product  of  negotiation,  there  is  no  need  for  this  

doctrine.    Both  parties  designed  the  contract.    Both  enjoy  its  benefits  or  suffer  its  

deficits.    

The  second  is  collateral  agreements,  understandings  and  representations.    

This  is  typically  dealt  with  in  the  “entire  agreement”  provision.  Nonetheless,  craft  

with  an  eye  to  inducements,  compromises  and  “gentleman  ‘s  “  understandings  that  

are  not  evident  in  the  document  and  not  meant  to  be  part  of  it  that  surrounded  the  

negotiation  of  the  indemnity.  

The  third  is  insert  a  clause  in  the  reps  and  warrants  provisions  that  unless  

otherwise  explicitly  prescribed  in  the  contract,  there  are  no  other  implied  or  

statutory  representations.    You  want  to  excise  this  from  the  compass  of  any  

indemnity.  

Finally,  depending  on  the  jurisdiction,  the  indemnity  provisions  need  to  be  

conspicuous.  CAPITAL  LETTERS,  red  ink,  thick box like font,  a  border  or  shading  

should  be  effective.  Anything  that  makes  the  provisions  obvious  and  readily  

readable  is  the  objective.  

THE  CONTRACT  IS  TOO  LONG      

Every  lawyer  has  had  a  client  instruct  him  or  her  to  put  the  deal  on  one  page  

or  at  least  keep  it  short.    In  one  of  life’s  many  ironies,  architecturally  sensitive  

contracts  take  up  to  4  times  the  length  of  the  old  turgid  style.    One  could  revert  to  

small  font,  legal  sized,  wide  margined,  two-­‐sided  printing.      

The  other  option  is  to  keep  the  scope  of  work  and  party  essentials  on  paper  

and  put  all  of  the  boilerplate  on  the  web.    The  federal  Public  Works  Department  has  

had  its  Standard  Acquisition  and  Conditions  on  the  web  for  over  a  decade.    The  cell  

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phone  providers  have  the  bulk  of  a  subscriber’s  contract  on  the  web,  including  the  

right  to  amend  from  time  to  time.  The  administrative  imperative  is  keeping  a  record  

of  those  terms  as  they  exist  at  any  time,  so  the  contract  would  cite:  as  per  T  &  Cs,  

dated  X.  

 

 

Whatever  the  case,  the  key  for  a  lawyer  is  to  aim  to  be  a  great  architect,  

continue  to  be  a  dependable  engineer  and  always  be  a  bit  of  a  psychologist  (for  

himself  and  of  those  across  the  table).    Those  dimensions  enable  effective  contract  

drafting.  

 

 

 

ENDNOTES                                                                                                                    1  Key  to  Understanding  Human  Dynamics,,  2008,  Career  /  Lifeskills  Resources  Inc.,  116  Viceroy  Road,  2  Douglas,  Mary;  Wildavsky,  Aaron;  Risk  and  Culture  –  An  Essay  on  the  Selection  of  Technological  and  Environmental  Dangers;  Berkeley:  University  of  California  Press;  (1983).  3    Peters,  Don,  Forever  Jung  ”Psychological  Type  Theory,  The  Myers-­‐Briggs  Type  Indicator  and  Learning  Negotiation”,  42  Drake  Law  Review  1  (1993);  Myers-­‐Briggs  Personality  Types  for  Negotiation;  Florida  State  University  College  of  Law  Research  Center,  Workshop  PowerPoints,  Spring  2009.  4  Fisher,  Roger;  Fry,  William;  Getting  to  Yes;    Penguin:  New  York;  (1983).  5  David  Tollen  is  a  founding  partner  of  Adeli  &  Tollen.  He  is  the  author  of  the  American  Bar  Association's  manual  on  technology  contracts,  The  Tech  Contracts  Handbook  (ABA  Publishing  2010),  and  also  the  author  of  The  Tech  Contracts  Pocket  Guide  (iUniverse  2006).    Comments  made  at  the  ABA  webnair  12  July  2011,  “Tech  Contracts:  Nine  Lessons  for  Drafting  and  Negotiating  Better  IT  Agreements”.  6  Priest,  George  L.;  The  New  Legal  Structure  of  Risk  Control;  Daedalus,  Vol.  119,  Issue  #4,  Fall  1990,  pp.  207-­‐227;  p.  209.  7  Priest,  George  L.;  The  New  Legal  Structure  of  Risk  Control;  Daedalus,  Vol.  119,  Issue  #4,  Fall  1990,  pp.  207-­‐227;  p.  209.  8  Malhotra,  Deepak  ;  “When  Contracts  Destroy  Trust”;  Harvard  Business  Review,  May  2009;  http://hbr.org/2009/05/when-­‐contracts-­‐destroy-­‐trust/ar/1.  9  Covey,  Stephen;  The  Speed  of  Trust:  The  One  Thing  that  Changes  Everything;  Free  Press:  (2006).  10  Sanbghera,  Sathnam;  You  Can’t  Write  Trust  into  a  Contract;    The  Times,  22  February  2010.  11  In  general  see:  Hall,  Geoff,  Canadian  Contractual  Interpretation  Law,  LexisNexis,  2007.  See  also:  Consolidated  Bathurst  Export  Ltd.  V  Mutual  Boiler  and  Machinery  Insurance,  [1980]  1  S.C.R.  888  at  901;  Eli  Lilly  v  Novopharm  Ltd.,  [1998]  2  S.C.R.  129,  para  56.    

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                                                                                                                                                                                                                                                                                                                                         12  Sullivan,  Ruth;  Contract  Interpretation  in  Practice  and  Theory;  (2000),  13  S.C.L.R.  (2d),  pp.  369  –  394,  p.  372.  13  Wills,  Ron;  McGlasson  Barry;  Graham,  Doug;  Joyce,  Daryle;  Post  Harvest:  An  Introduction  to  the  Physiology  and  Handling  of  Fruit,  Vegetables  and  Ornamentals  (5th  ed.);    Cambridge:  CABI  (2007)  14  Freidberg,  Susanne;  Fresh,  A  Perishable  History:  Cambridge:  Harvard  University  Press;  (2009);  p.  5.  15  Title  21:  Food  and  Drugs  

PART  101—FOOD  LABELING  

Subpart  F—Specific  Requirements  for  Descriptive  Claims  That  Are  Neither  Nutrient  Content  Claims  nor  Health  Claims  

§  101.95      “Fresh,”  “freshly  frozen,”  “fresh  frozen,”  “frozen  fresh.”  

The  terms  defined  in  this  section  may  be  used  on  the  label  or  in  labeling  of  a  food  in  conformity  with  the  provisions  of  this  section.  The  requirements  of  the  section  pertain  to  any  use  of  the  subject  terms  as  described  in  paragraphs  (a)  and  (b)  of  this  section  that  expressly  or  implicitly  refers  to  the  food  on  labels  or  labeling,  including  use  in  a  brand  name  and  use  as  a  sensory  modifier.  However,  the  use  of  the  term  “fresh”  on  labels  or  labeling  is  not  subject  to  the  requirements  of  paragraph  (a)  of  this  section  if  the  term  does  not  suggest  or  imply  that  a  food  is  unprocessed  or  unpreserved.  For  example,  the  term  “fresh”  used  to  describe  pasteurized  whole  milk  is  not  subject  to  paragraph  (a)  of  this  section  because  the  term  does  not  imply  that  the  food  is  unprocessed  (consumers  commonly  understand  that  milk  is  nearly  always  pasteurized).  However,  the  term  “fresh”  to  describe  pasta  sauce  that  has  been  pasteurized  or  that  contains  pasteurized  ingredients  would  be  subject  to  paragraph  (a)  of  this  section  because  the  term  implies  that  the  food  is  not  processed  or  preserved.  Uses  of  fresh  not  subject  to  this  regulation  will  be  governed  by  the  provisions  of  403(a)  of  the  Federal  Food,  Drug,  and  Cosmetic  Act  (the  act).  

 

(a) The  term  “fresh,”  when  used  on  the  label  or  in  labeling  of  a  food  in  a  manner  that  suggests  or  implies  that  the  food  is  unprocessed,  means  that  the  food  is  in  its  raw  state  and  has  not  been  frozen  or  subjected  to  any  form  of  thermal  processing  or  any  other  form  of  preservation,  except  as  provided  in  paragraph  (c)  of  this  section.  

 

(b) The  terms  “fresh  frozen”  and  “frozen  fresh,”  when  used  on  the  label  or  in  labeling  of  a  food,  mean  that  the  food  was  quickly  frozen  while  still  fresh  (i.e.,  the  food  had  been  recently  harvested  when  frozen).  Blanching  of  the  food  before  freezing  will  not  preclude  use  of  the  term  “fresh  frozen”  to  describe  the  food.  “Quickly  frozen”  means  frozen  by  a  freezing  system  such  as  blast-­‐freezing  (sub-­‐zero  Fahrenheit  temperature  with  fast  moving  air  directed  at  the  food)  that  ensures  the  food  is  frozen,  even  to  the  center  of  the  food,  quickly  and  that  virtually  no  deterioration  has  taken  place.  

(c) Provisions  and  restrictions.  (1)  The  following  do  not  preclude  the  food  from  use  of  the  term  “fresh:”  

 

(i)  The  addition  of  approved  waxes  or  coatings;  

(ii)  The  post-­‐harvest  use  of  approved  pesticides;  

(iii)  The  application  of  a  mild  chlorine  wash  or  mild  acid  wash  on  produce;  or  

(iv)  The  treatment  of  raw  foods  with  ionizing  radiation  not  to  exceed  the  maximum  dose  of  1  kiloGray  in  accordance  with  §179.26  of  this  chapter.  

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                                                                                                                                                                                                                                                                                                                                         (2)  A  food  meeting  the  definition  in  paragraph  (a)  of  this  section  that  is  refrigerated  is  not  precluded  from  use  of  “fresh”  as  provided  by  this  section.  

[58  FR  2426,  Jan.  6,  1993]  

 16    For  industrial  organic  see:  Guthman,  Julie;  Agrarian  Dreams,  the  Paradox  of  Organic  Farming  in  California,  Berkeley:  Berkeley  University  Press,  (2004);  for  ideological  organic  see:  Fast  Food  /  Organic  Food  Reflexive  Tastes  and  the  Making  of  “Yuppie  Chow”,  Social  and  Cultural  Geography  4.1(2003)  45-­‐58;  for  the  Christian  and  metaphysical  roots  of  organic  see:  Conford,  Philip;  The  Origins  of  the  Organic  Movement;  Floris:Edinburgh  (2001).  China  is  rapidly  becoming  the  largest  organic  producer  in  the  world  with  several  definitions  of  organic:  see      Mei,  Yang;  Jewison,  Michael;  Organic  Products  Market  China;  USDA  Foreign  Agricultural  Report;  GAIN  Report  (Global  Agricultural  Information  Network)  Number  #CH6405,  (2006).  

17  Pollan,  Michael;    Behind  the  Organic-­‐Industrial  Complex;  New  York  Times,  13  May  2001.    18  Hamilton,  Alissa;  Squeezed:  What  You  Don’t  Know  About  Orange  Juice.  Yale  University  Press;  (2009).  19  Ibid.,  chapter  13.  20  Hall,  Geoff;  Canadian  Contractual  Interpretation  Law;  (1st  ed);  LexisNexis:  Toronto;(2007).  21  Sullivan,  op.  cit.  22  For  the  intentional  school  see:  Consolidated  Bathurst  Export  Ltd.  V  Mutual  Boiler  and  Machinery  Insurance,  [1980]  1  S.C.R.  888;  for  the  textual  school  see  Eli  Lilly  #&  Co.  v  Novopharm    [1998]  2  S.C.R.  129  reversing  (1996)  195  N.R.  378,  reversing  (1996)  91  F.T.R.  161.  23  In  general  see:  Kleinwort  Benson  Ltd.  v  Malaysia  Mining  Corp.  Bhd.,  [1988]  1  All  E.R.  714  (Q.B.  Commercial);Toronto  Dominion  Bank  v  Leigh  Instruments  (1992),  4  B.L.R.  220  (C.A.);  Langnese-­‐Iglo  GmbH  v  European  Commission  (supported  by  Mars  GmbH)  (Case  C-­‐279/95  P)  COURT  OF  JUSTICE  OF  THE  EUROPEAN  COMMUNITIES  (FIFTH  CHAMBER)  [1999]  All  ER  (EC)  616  .  24  Bawitko  Investments  v  Kernels  Popcorn,  (1991)79  DLR  (4th)    97  OCA    pp  103-­‐4  ;    see  also  US  Jurisprudence    Adkistrote  Systems  Inc.  v  GAB  Bus  Sys  Inc,  145,  F  3d  543  (2d  Cir)  1998;  Skycom  v  Telstar  813  F.3d  810  (7th  Cir)–  Texaco  v  Pennzoil  729  S.W.2d  768  (Tex  App  1987).  25  Tercon  Contractors  Ltd.  v.  British  Columbia  (Transportation  and  Highways),  2010  SCC  4,  [2010];  1  S.C.R.  69;  The  Queen  (Ont.)  v.  Ron  Engineering,  [1981]  1  S.C.R.  111.    For  a  detailed  discussion  see  Paul  Emanuelli  /  The  Procurement  Office.  26    Von  Hatzfeld-­‐Wildenberg  v  Alexander,  [1912]  1  Ch  282.  27  Ex  parte  Dawes,  In  re  Moon  (1886),  17  Q.B.D.  275  (C.A.)  28  Canada  AG  v  Bitove  Corp  (1995),  47  R.P.R.  (2d)  157.  29  Elderkin,  Cynthia;  Shin-­‐Doi,  Julia;  Behind  and  Beyond  Boilerplates:  Drafting  Commercial  Agreements  (2ed):  Thomsom-­‐Carswell:  Toronto;  (2005)  p.  65.  30  McMaster  University  v  Wilchar  Construction  Ltd.,  [1971]  3  O.R.  801,  812  (H.C.J.)    As  to  the  history  and  significance  of  a  seal  see:  Friedmann  Equity  Developments  Inc.  v  Final  Note  Ltd.,  [2000]  1  S.C.R.  842,  856.    For  ta  text  the  use  and  need  for  seals  under  UK  law  see:  http://www.lawsocietyshop.org.uk/ecom_lawsoc/public/saleproduct.jsf?catalogueCode=9781853286995.  31  Board  of  Trustees  of  the  Leland  Stanford  Junior  University  v  Roche  Molecular  Systems  Inc.  563  US.  (2011)  

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 ©  2011  Dr.  Stan  Benda    

     

                                                                                                                                                                                                                                                                                                                                         32  Chandelor  v    Lopus,  Case  4,  Exchequer-­‐Chamber,  CRO,  JAC  4,  Easter  Term.  33  Darmstadter,  Howard;  Hereof,  Thereof,  and  Everywhereof,  a  Contrarian  Guide  to  Legal  Drafting  (2ed),  Washington:  ABA  (2008),  p.  120.  34  ABA  model  Stock  Purchase  Agreement  (1995);  Model  Asset  Purchase  Agreement  (2001);  Krys  v  Henderson,  69  S.E.  2d  635,  637  (Ga.  Ct.  App.  1952).  35  Fox,  Charles,  Working  with  Contracts:  What  Law  School  Doesn’t  Teach  You;  (2ed)  Practising  Law  Institute:  New  York;  (2008),  pp.  11-­‐15.  36  Adams,  A.,  Kenneth;  A  Lesson  in  Drafting  Contracts,  What’s  Up  with  ‘Representations  and  Warranties”,  Business  Law  Today;  Vol  15,  No.  2;  ABA;  November/December  2005.  37  In  general  see:  Lupton,  Ellen;  Thinking  with  Type:  A  Critical  Guide  for  Designers,  Writers,  Editors  and  Students;  Princeton  Architectural  Press:  New  York  (2004).  38  Darmstadter,    op.  cit.,  p.  71.  39  Ibid.,  p.  72.  40  Mewburn  v  Mackelean  (1892),  19  O.A.R.  729  (C.A.),  p.  741.  41  Gray,  Margaret;  The  Nature  of  Indemnities,  Indemnities  in  Commerce  and  the  Courts;  Canadian  Bar  Assoc.,  November  1994  42  Mobil  Oil  Canada  v  Beta  Well  (1974),  453  D.L.R.  (3d)  745,  affd  50  DLR  (3d)  158  found  the  indemnity  only  covered  third  party  claims.  43  Hebert,  Brenda;  Taylor,  Melissa;  A  Review  of  Specific  Indemnity  Problems  Indemnities  in  Commerce  and  the  Courts;  Canadian  Bar  Assoc.,  November  1994,  p.  11.  44  Lowman,  Tim;  Indemnification  and  Insurance  Provisions  in  Licence  Agreements;  Presented  to  the  Osgoode  Hall  (York  University)  Legal  Drafting  Course,  Winter  2008,  p.  3.  45  Lowman,  Tim;  Indemnification  and  Insurance  Provisions  in  Licence  Agreements;  Presented  to  the  Osgoode  Hall  (York  University)  Legal  Drafting  Course,  Winter  2008,  p.  6.  46  Mobil  Oil  Canada  v  Beta  Well  (1974),  453  D.L.R.  (3d)  745,  affd  50  DLR  (3d)  158  found  the  indemnity  only  covered  third  party  claims.  47  Lowman,  op.  cit.,  p.  4.  48  See  in  general:  MacDougal,  Bruce,  Introduction  to  Contracts;  Toronto:LexisNexis  (2007);  pp.  146-­‐158;  see  also  Hall,  Geoff;  Canadian  Contractual  Interpretation  Law  (1st);  LexisNexis:Toronto  2007,  pp.  238  –  252.  49  Hunter  Engineering  Co.  v  Syncrude  Canada  Ltd.  [1989]  1  S.C.R.  426.  

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CASSELS BROCK LAUNCHES NEW WEBSITE, AN INFORMATION HUB FOR IN-HOUSE COUNSEL Published: 05/04/2011

Dedicated Website Offers ‘One-Stop’ Archive of Educational ResourcesCassels Brock & Blackwell LLP, one of Canada’s leading business law firms, has launched the Cassels Brock Bulletin Board, a ‘one stop’ compilation of its educational resources for corporate counsel.

The new dedicated website (http://ccbb.casselsbrock.com) is a repository of seminar presentation materials, newsletter articles, practice management tips and other reference materials of particular relevance to lawyers working in-house. The site features a full keyword search function and is extremely easy to navigate.

This new web portal demonstrates Cassels Brock’s commitment to continuously improve the quality and accessibility of the information and resources we share with our clients.

Media MentionsThe Corporate Counsel Bulletin Board was featured as a valuable one-stop resource for in-house counsel in The Financial Post, Business Section, Canadian Lawyer Magazine and Law Times.

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STUART ENGLISH

416 860 5223 [email protected]

Education: LL.M., (IP), Osgoode Hall Law School, 2009; M.B.A., Schulich School of Business, York University, 1992; LL.B., Osgoode Hall Law School, 1992; B.Sc., Concordia University, 1988 Call to the Bar: Ontario, 1994

Expertise Stuart is a partner in the Business Law Group where he practises corporate and commercial law, and has been involved in numerous significant business acquisitions/divestitures, venture capital financings, management buy-outs, and joint ventures.

Apart from transactions, Stuart regularly advises clients on a range of corporate and commercial matters, including shareholder and partnership agreements, joint ventures and other strategic alliances, corporate governance matters, stock option and other employee incentive plans, manufacturing, distribution, outsourcing and licensing agreements, and corporate compliance programs and other risk management initiatives.

Stuart has advised clients in many industries, and has particular expertise in financing emerging technology companies and transactions involving life science companies.

Stuart is a member of Cassels Brock's Practice Support Group, which oversees the firm’s knowledge management initiatives, and is a regular speaker at Cassels Brock’s Corporate Counsel Seminar Series.

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ROBERT B. COHEN

416 869 5425 [email protected]

Education: LL.B., Osgoode Hall Law School, 1989 Call to the Bar: Ontario, 1991 Associations: Canadian Bar Association; Ontario Bar Association; Toronto Lawyers Association; The Advocates’ Society Achievements: Martindale-Hubbell, BV DistinguishedTM rating

Expertise Bob practises in the field of commercial litigation and litigates cases in various areas of law, including oppression remedies and other shareholder disputes for public and private companies, securities regulation, partnership disputes, injunctions, defamation, banking disputes, employment law, real estate litigation, investor fraud, receiverships, contract disputes and professional malpractice. He acts for a broad spectrum of clients, ranging from individuals and entrepreneurs in small and large businesses as well as boards of public companies.

Bob has had a number of favourable arbitration, trial and Court of Appeal decisions, many of which have been reported in various legal reporting services. In addition to appearing in the Ontario Securities Commission as successful counsel (InterRent REIT), he has also appeared as successful counsel before the Ontario Court of Appeal in seminal decisions on banking law (Valentine v. TD Bank) and contract and disclaimer interpretation (Solway v. Kennedy). Bob also appeared as successful counsel in the Supreme Court of Canada decision determining presumptions of law as they pertain to joint bank accounts in the context of estate disputes (Saylor and Madsen v. Brooks).

Bob has considerable negotiation skills which have led to efficient and large settlements for his clients, including dozens of large settlements in multi-million dollar investment fraud cases. He is well-versed and has acted as counsel in alternative dispute resolution methods, including mediation and arbitration.

He is a member of the Canadian Bar Association, the Ontario Bar Association, the Toronto Lawyers Association and the Advocates’ Society.

Bob joined Cassels Brock in 1992 and has been a partner at the firm since 1999. He taught Civil Procedure at Osgoode Hall Law School for many years and is now a mentor in the firm's associate training program.

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George Weston Limited 22 St Clair Ave E

Toronto, ON M4T 2S7 Canada

Robert A. Balcom Robert A. Balcom is Senior Vice President, General Counsel – Canada and Secretary of George Weston Limited, and Senior Vice President and Secretary of Loblaw Companies Limited in Toronto, Ontario. Prior to joining the Weston/Loblaw Group, Mr. Balcom practiced corporate/commercial law as an associate at Borden Ladner Gervais LLP. Mr. Balcom’s practice encompasses business acquisitions and divestitures, corporate finance transactions, competition law, and general commercial matters. Mr. Balcom is also involved in a variety of corporate governance and corporate secretarial matters. Mr. Balcom graduated from Acadia University in 1983 (Bus. Admin. (Hons.)), from Dalhousie University with an LLB and MBA in 1987 and from Osgoode Hall Law School with an LLM, specializing in International Trade and Competition Law, in 1998. He was admitted to the Ontario Bar in 1989. He is a member of both the Canadian Bar Association and the American Bar Association. George Weston Limited is a large North American food processing and distribution company and one of the largest corporations in Canada. Weston has two operating segments: Weston Foods and Loblaw. The Weston Foods segment is engaged in the baking industry within North America. Loblaw Companies Limited is Canada’s largest food distributor and a leading provider of general merchandise, drugstore and financial products and services.

Page 96: commercial contract drafting and negotiation

169 - 260 Adelaide Street East, Toronto, Ontario, Canada M5A 1N1

www.iplawyertoronto.com

DR. STAN BENDA

416 366 3538 416 366 4532 [email protected]

Dr. Stan Benda holds a PhD in law (labeling of genetically modified foods), a LLM in intellectual property. He is adjunct faculty at Osgoode Hall (contracts drafting), Ryerson Business School (IP) and the University of Ontario, Oshawa (business). He graduated from RMC and trained as an armour corps officer. He was senior counsel with Justice Canada. He represented Agriculture Canada: the intellectual property office (technology transfer); legal delegate to UN FAO agricultural genetic treaty meetings. Previously he was the federal counsel on the privatization of airports in Western Canada, Maritime ferry lines and private sector projects in Banff /Jasper. He publishes in the area of plants, breeding, genetics, and food. His practice is focused on IP licensing and agricultural biotechnology / food processing.


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